I’m a bit of a budgeting nerd. I excitedly look forward to the time every week when I input transactions into my budgeting software (we use YNAB which stands for “You Need A Budget,” but more on that later.) Partly it is because I love numbers and math, but also because I know how important budgeting is to achieving my future financial goals. Namely, I want to be financially independent so I can spend more of my time doing what I love to do.
My friend, Chris, has a similar goal. He wants to escape the loop of the 40-hour workweek so he can focus more on his creative passions, namely writing. His series of blogs on “Escaping the Loop” have been phenomenal. I would highly recommend them for anyone who also wants to escape the repetition of their current life for more creative pursuits. Because I’m so passionate about finances and budgeting, his most recent post especially caught my eye. Check it out here.
If I were to ask most people why they don’t spend more time being authentic to their passions, I can bet money would be one of the biggest reasons. This is not surprising since research has shown that approximately 39% of Americans could not cover a $400 emergency and this was before the COVID-19 pandemic! Seventy-eight percent of people live paycheck-to-paycheck. When I see these numbers, I am blown away and astounded. This sounds incredibly stressful!
What does this mean? People inevitably get into debt. Next thing you know, an emergency happens: car troubles, broken furnace, medical emergency, unexpected unemployment- so many things can happen that disrupt the financial situations of someone living paycheck-to-paycheck. The reality is that if you are caught in this loop of always not having enough. Something needs to change.
“Budgets don’t work!”
Sadly, for many, the above statement is true. Budgets just show you how little money you have and how little you have to spend. Budgets don’t create money that isn’t there, but could they? Budgets don’t teach self-discipline, but could they?
If you are in financial trouble, you NEED to be tracking your expenses against your income. If you are doing this and it’s still not working, something has to change.
Part of the problem is how we’ve been trained to budget. You create a budget at the beginning of the year/month and you place money into different categories. At the end of the year, you check and see if you came out balanced. Along the way, you likely spent money you didn’t have assuming you would continue to have a fixed income. Then, we are surprised at the end of the year when we have a budget shortfall.
I don’t know of any person or organization that can predict how much money you will make in a year accurately. There are always variables positive and negative. If you work for a salary, will you get a raise? If you do, what happens to that money? Do you just spend it? If you work hourly, what happens when you unexpectedly need 2 weeks off and don’t have vacation or sick time? You made less money than expected! Your budget is now wrong!
What happens if something truly unexpected happens and you don’t have money set aside in your budget for it? Outside of extreme cases, there are very few financial surprises that you cannot be prepared for. That’s why you build it into your budget.
The biggest reasons budgets don’t work is due to lack of self-discipline. If you can’t hold yourself to the budget, the budget means nothing. If you allow yourself to spend money you don’t have, you will never have enough money.
Budget the YNAB Way
As I was assessing whether to buy a business in the past year (see that post here,) I was not only shocked, but horrified to find out that the most common bookkeeping application, QuickBooks, does not function as my current budget software. It simply tracks your income and expenses and places them into categories. This is great for being ready for filing taxes, but not great for maximizing your cash flow.
My favorite budgeting software is You Need A Budget (YNAB). One of the biggest reasons I love it is because it starts at the basic premise of budgeting only money that you make and telling every dollar where to go. It’s simple, you receive your paycheck and you then categorize those dollars. If you don’t spend money in a category, it rolls that balance over to the next month allowing you to save up for future purchases. This is not how most budgeting software works and that completely baffles me.
The genius of this way of budgeting is that it allows you to know in real-time how much money you have in each category based on how much money you actually have in the bank. I know from looking at my budget how much money I have in my emergency fund, how much I can invest, and how much I’m saving up for my next car insurance payment.
Imagine running a business with an irregular cash flow, aka EVERY business. No one can predict what sales and expenses will be, but you can put money away for the future expenses and spend less than what you bring in. If there is extra available beyond funding essential categories, you get to determine how to put that money to work. This could be for future emergencies, marketing, and research and development. The key is that you get to decide how to use it and you’re not just making guesses on whether you can afford it.
YNAB takes all the guesswork out of it. Can I afford this new house project? If you look at your bank account you might have $10,000. Great! I guess I can afford it! Look again. $1500 is needed for the mortgage or rent. $500 for groceries. $2000 for other regular bills. The car needs new brakes for $1000. It also happens to be the middle of the winter and your 25-year old furnace just went out for $5000. There aren’t really any surprises here. Knowing how much money you actually have available for discretionary spending is life-changing. Your bank account makes you think you can afford your $1500 house project, but your budget tells you you’d actually be spending next month’s mortgage payment.
Good Budgeting Creates Financial Freedom
I have often had people tell me that budgeting makes them feel like they need to give things up and restrict themselves. In the short-term, this may be the case. If you are in any sort of debt (minus your mortgage,) your best choice is to burn down that debt with gazelle-like intensity. (Any Dave Ramsey fans out there?) Getting debt free is the best investment you can make.
Once you are out of debt, the budget creates opportunity. It tells you when you are financially ready to buy a home and what price of home you can afford. (Please note: the bank will likely approve you for a loan nearly 2x what you can actually afford. Buyer beware!!! The more money the bank loans you, the more money they make!) You can know whether you can afford something and then not feel guilty spending the money. Instead of feeling like there is never enough money, you can honestly feel like you have more than enough. This comes from telling your money where it goes and spending LESS than you make. Thomas Stanley’s research confirms that most American millionaires don’t look like millionaires. They live frugally, invest wisely, and don’t go into debt.
Herein lies the path to escaping the loop. When you master the self-discipline of practical budgeting, you open up opportunities to have the financial freedom to pursue your passions rather than fulfilling someone else’s. Good budgeting practices free up more money for long-term investments, developing skills, and doing what matters most to you. This is not a fictional place that only high income earners can reach. It is accessible to anyone who decides they will live below their means no matter what. From that comes a place of abundance. A realization that you are not in competition for every last dollar.
Rather than viewing budgeting as a way to pinch your pennies and stash it away, view it as a way to create an abundance of resources. Telling your money where to go will do exactly that. Instead of living in a world of scarcity where everyone fights for every last penny, it creates a world of abundance where you have the freedom to give more to others through your time, money, and creative skills or ideas. Escape the loop!