Personal Budgets That Work

Budgets do a lot of good, but you probably heard that already. If budgets do so much good, then why do we avoid them? 

Budgets are like exercise and eating right. We know diet and exercise is good for us. We know diet and exercise will help us be better people. We know the amazing benefits that happens when we follow a diet and exercise. Yet, we don't. It is easier, and more rewarding in the short term to gorge ourselves and sit and surf the interwebs. 

Budgets suffer the same stigma like diet and exercise. We know the benefits, but the discipline and work involved to maintain a budget or dieting or exercise scares us to accept the short term pleasures in lieu of long term success.

How do we make a budget work? If you're single and you have a money spending issue, then get someone who you trust and is responsible. Make them your "sponsor" and submit yourself to their direction and oversight. Some churches offer budget counselors to help in this area. 

Married couples need to be on the same boat. If one person controls the creation and maintaining of the budget, make sure to do weekly budget meetings with the other spouse. The reason is to make sure that everyone is clear on where the money goes during the week. This will prevent one person having all the control and keeping the other spouse in the dark.

The last thing you should do is get a budgeting program. If you read my other posts, you'll  know I'm a fan of YNAB. The cost for YNAB is $60 dollars but you can get $6 dollars off by following this link. While $60 dollars may be a lot of money, just remember YNAB offers a 34 day free trial, and if you follow the rules in YNAB, the money you'll save will  pay for the cost of the program.

YNAB vs Mint

Get a $6.00 Coupon Code by clicking this link

I've tried many different personal finance software. From the uber complex Quicken, to the free services of Mint.com, and now YNAB. I've gone over why YNAB is superior to Quicken. To quickly sum up why, it is because YNAB helps you on the path of saving money by being a forward thinking financial program. Quicken is excellent looking at past data but it doesn't show you were you are going.

When I compare Mint against YNAB the choice is clear. YNAB is the best choice to start controlling your financial destiny.

Mint is a less robust version of Quicken. It imports and categorize transactions in your checking account, and creates fancy graphs. It allows you to track (though limited) investments. It is a great way to get organized with your finances, and get a complete picture of your state of affairs. The biggest problem I have is that Mint then tries to sell you financial items (credit cards, home loans, auto loans, etc...).Another issue is that its budgeting tool is mediocre at best. The best factor of Mint, its free.

YNAB is 60 dollars (get 6 dollars off by clicking this link). It is as expensive as Quicken Deluxe. It doesn't offer the same reporting or major tracking abilities like Quicken and Mint. At first this was a reason why I didn't buy this program, but I realized that if I don't get my money in order, no amount of reports will change my habits. I switched to YNAB and used it, and the methodology does work.

Unlike my last post about YNAB vs Quicken, if you are just starting to get into managing your personal finances. Start with Mint, since it is free. I would just go straight to YNAB. My wife and I started March first with 1395 in our checking account. We ended March with 1675, which is a gain of 280 dollars. Trust me, one month of using YNAB will easily pay for itself.

The Pareto Principle of Personal Finance

The Pareto Principle or also known as the The 80/20 Rule is simple:

"Roughly 80% of the effects come from 20% of the causes"

A quick glance at the wiki article above sums up that the 80/20 rule is applied to different areas from economics to nature. I suggest we apply the same rule to personal finances. 20% of your income should generate 80% of your wealth.

How is this possible? Live off of 80% of your income and save the other 20%. That 20% should then be divided according to your family needs. Do you have an emergency fund? If you don't, you should take that 20% and build a 3 month one first. Have debt? After you have an emergency fund, take that 20% and pay off debt. Once you finish those steps then save 10% of that 20 for retirement (especially if your young). If your older save 15% for retirement out of that 20%.

The rest of that twenty should go into saving for items that you may want like a new car, furniture, vacations, college, and so on. This method will allow you to pay in cash for items, and gives you negotiation room when haggling. It will free you from using "90 days same as cash" or other financing scams that will put you in the hole. 

The very act of paying off debt is equal to getting a raise. The money you spend every month on credit card minimum payments could go to savings. Once the debt is go, you can pay using cash for the things you want.

I suggest using YNAB to start you off on the road of financial management. Once you have a buffer, then move to Quicken to maximize the money you earn and keep.

YNAB vs Quicken 2014

While on the surface YNAB and Quicken do the same thing, help manage your money, but that is where the similarities end.

YNAB is a purely devoted budgeting system. It does have some report abilities, but its primary goal (which it does flawlessly) is to manage cash flow. Remember, like businesses, cash flow is the life blood of a family's finances. To sum up the importance of cash flow, I like to quote Frank Hebert' Dune: "The Cash Must Flow"

YNAB cost 60 dollars to purchase (you can buy Quicken Deluxe for the same price). What you get is a program that does not have a sunset policy (Quicken expires after 3 years), and a program that comes with a unique money philosophy.

The philosophy tries to move the family from the paycheck to paycheck lifestyle to a living on last months income for the current months expenses. This is done using a buffer, as the YNABers call it. This buffer tends to be the most confusing part of the philosophy; however, once you move past the initial confusion, you are left with a wonderful budgeting tool.

But let me say it again, YNAB is a budgeting tool that only works as long as you follow the system the developer created. How YNAB tracks your money is similar to any financial software. Just don't expect fancy reports outside of a few basic ones they provide, but in all honesty, how many reports do you really need for your personal finances?.

Quicken is for people who want to manage there money on a level that businesses do. Other than spending reports, net worth, and spending analysis that YNAB offers. Quicken tracks taxes, investments, business expenses, run financial scenarios  analyze loans, track mortgage interest, and the list goes on.

While it might be easy to say that one may never need these abilities, I would disagree. Personal finance is all about knowing what your money does. YNAB gives every dollar a job, but lacks the ability to track and analyze how those dollars work. Quicken takes the past to create reports to see where you've been, but lacks the ease, flexibility, and forward thinking that YNAB offers.

The end decision is simple. When it comes to YNAB vs Quicken the choice is clear. Get both ideally. If you cannot afford both. Buy YNAB ($60) then save up to get Quicken (buy at least the Deluxe version). Use YNAB to manage your budget, and use Quicken to run reports and track taxes, investments, and analyze future financial scenarios that may impact your life.

Why Use Quicken

The minimum recommended version of Quicken I would suggest to anyone who is seeking to control their financial situation is Quicken Deluxe. The problem most people would have with that advice is that Quicken Deluxe cost 60 dollars to purchase.

You can find it cheaper on Amazon but the problem is the same. Quicken is expensive. Why spend 60 when you can get the same thing using Mint.com?

I've used Mint before. It is a great program that helps anyone,  regardless of financial ability,  to start tracking their personal finances. Mint is a program that helps track money. Quicken manages your cash.  Quicken is the big leagues.  The reports you can generate,  the different types of accounts you can track,  even the unique way to track gold and airline miles in Quicken.

I like Mint.  I think every 16 year old should sign up for a free account to start forming the habit of budgets and spending patterns. But after one gets a full time job,  or has multiple accounts from loans to investments,  Quicken should be used.  The ability for Quicken to track important tax info has paid for the program this tax season.

Quicken,  when used regularly and when you read how to use its features, is a powerful tool for the management of money. Quicken gives you the greatest tool in personal finance. Knowledge.

How To Track Cash in Quicken

How to track cash in Quicken

To track cash click on "add an account"-->Click cash-->Name the account (I use our envelopes to name the accounts)-->Select the beginning of year--> Enter the starting balance (we started tracking cash after we started the envelope system, so I entered what we had in the envelope as the starting balance)-->Your done

Over time we are able to see if we need to increase cash in one envelope or if we can get rid of one we don't use too much. It helps us communicate, and it saves us money.

Why Use Cash

There is a big difference between logging into your bank and seeing $100 in your account, and physically holding a $100 bill. In our current age, money is an abstract object. Yes we see numbers that represent money when we view our balances online. We see positive numbers increase the balance and negative numbers subtract from it, we don't think about the very act of paying for items. We just swipe our bank card or credit card to pay for an item.

Want to reduce spending? Open Quicken( this should be done after you import your checking accounts transactions and categorize them) click on the spending tab, then change the graph to represent only your checking account, and the time range for last month only.

From that monthly total, subtract bills that you pay using your checking account (car payments, mortgage/rent, utilities, etc...) so all that you are left with is spending on everything else that you swipe the card for. Now take that amount and divide it by four weeks in a month.

Once you find your weekly number, round down to the nearest twenty. The reason to round down to the nearest twenty is because most ATMs dispense cash in increments of twenty. An example is if your weekly spending is 256.55, you would withdraw 240 every week.

Take the cash you withdrew and sort them into envelopes with each category you spend on. My family has an envelope for groceries, housing goods, kid supplies, going out to eat money. When the cash in a specific envelope runs dry, no more spending. The system works if you don't raid another envelope to increase the cash amount in another. My wife and I had a problem with this. We would "borrow" from the grocery envelope to pay for a trip to go out to eat.

This system works if you keep on top of it. Right now my wife and I withdraw only 160 per week to pay for our food, supplies, and misc. items. We use to spend 372.50 per week swiping the card (not to mention the credit card also). To put that in perspective:

372.50 x 4 weeks=  $1,490.00 per month

160 x 4 weeks= $640.00 per month

Savings of $850 dollars a month!

We haven't been perfect, but on average we spent at least 500 dollars less on average every month. That amount of savings is like getting a raise!

I track our envelopes in Quicken which helps my wife and I stay on track. She does the shopping so handles the cash and withdraw of money. I track the spending and adjust our budget based on her suggestions. Over time we are able to see if we need to increase cash in one envelope or if we can get rid of one we don't use too much. It helps us communicate, and it saves us money.

What type of system do you use to control spending?

How To Track Gold and Silver in Quicken

Many people, in times of economic uncertainty  run to precious metals to hedge against inflation. I believe that having physical on hand gold may be a little extreme, but having precious metals in your portfolio isn't an extreme or far-out idea. Precious metals bring a constant and steady rate of return. Precious metals have done great the past couple of years because of the uncertainty in the world market. I do believe that silver might be over sold, but gold would be a good hedge since it is the international unit of exchange after the US dollar.

But this post isn't to talk about the value of precious metals or why you should or shouldn't buy them. The point of this post is to explain on how to track them in Quicken. I  believe the more you know of your finances the better you are at understanding how well you are. Knowledge is important. You have to know what your net worth is. You have to know the value of the gold you keep in a safe in your bedroom behind the painted portrait of your mom. Why? Knowing your net worth is a way to see how well you are doing. If you have a negative net worth, you know you are doing something wrong or its been a bad year. If you have a net worth of over a million? Congratulations, you are a millionaire.

Since some people have physical gold on hand, and not in a brokerage  how would you track it in Quicken? You could just create an asset account and update the total amount using transactions  but that takes time and is inefficient.

The best choice is to go to add an account-->Advanced Set-up-->Click I want to enter my transactions manually-->Create account name "Gold in safe, or gold at Bank of America"-->Set the start date to the beginning of the year with the account amount being zero (This will allow my purchase of a gold to become a transfer into my account)--> Then enter the ETF symbol for gold (GLD)*** or SLV*** for silver, Quicken will automatically adjust your value every time you update you stock quotes-->Once Quicken finds you quote for gold, click other-->Enter your total shares (for gold see note below)-->Click done--> Say no to the mutual fund option that Quicken gives.

Congratulations, you are now tracking the value of your physical on hand gold in Quicken!

*** NOTE: The Silver exchange-traded fund tracks the price of one ounce of silver, so if you have 10 10 troy ounce ingots  then you say you have 100 ounces of silver. Gold is tracked by one tenth an ounce of gold, so when you enter your investments, you’ll need to multiply your quantity by ten. For example, if you buy two ounces of gold, you would enter this as a purchase of 20 shares rather than two.