« Let the Debt Reduction Begin! | Home | How Do You Measure Up as a Money Saver? »
The Holy Grail of Budgeting
By DaveM | March 23, 2006
Until November of last year, my idea of budgeting was listing all our expense categories on a spreadsheet, assigning amounts to each one, comparing the totals to our monthly income, and updating it once a month. I never really tracked our actual income & expense transactions against the spreadsheet, so it was pretty much useless as a true budgeting tool.
Trying to use Quicken (or MS Money) was no better. First, I had to keep everything up to date which never seemed to happen, and the budgeting features are based on what already happened the previous month. By then, it was too late anyway because the budget was blown.
There had to be something better but I never really cared because I just figured I was doing it the best way I knew how.
Quite on accident, I stumbled upon “You Need A Budget” late last year while surfing the ‘Net. It’s a wonderful website and blog maintained by a great guy named Jesse Mecham.
What Jesse taught me about budgeting over the course of just a few days absolutely changed my life! I learned four rules of budgeting that literally blew me away! Finally, I understood why I’d never been able to budget successfully in the past.
The budgeting rules I learned from Jesse are:
Rule #1 - It’s All About Timing. You absolutely must get one month ahead of the game and operate (budget) on the income you earned the previous month.
Rule #2 - Give Every Dollar a Job. This means allocating every dollar each month to some category. Also known as zero-based budgeting.
Rule #3 - Prepare for Rain. This rule guarantees that you’re ready for all those once-in-a-while expenses that always seem to sneek up on you.
Rule #4 - Roll with the Punches. Ensures that you’re always paying yourself back, automatically, when you do go over budget in a category or two. Yes, it’s bound to happen, even if you’re budgeting smart. We’re human, remember?
Of course, there’s much more to understand about the four rules than I’ve explained here. Be sure you visit YouNeedABudget.com for the whole picture.
Much to my delight, Jesse just happened to offer an elaborate Excel spreadsheet he created that incorporates the four rules into one tidy little package. At only $20 with free updates for life, I had to have it. On December 1, 2005, after inundating Jesse with questions (which he cheerfully and thoroughly answered) we dove head first into the YNAB budgeting system.
For the next three months, my wife and I spent about 20-30 minutes each week updating the spreadsheet, and then about an hour at the beginning of each month reviewing the budget and allocating funds to our “envelopes” (categories) for the new month.
As simple as it all sounds, we had NEVER felt this in control of our money since marrying over 17 years ago! It’s an incredible feeling to ACTUALLY KNOW where all your money is going, and exactly how much you have left to spend in each envelope. If you do overdraw an envelope, it’s a breeze to simply borrow from another to cover it. Of course, if you don’t want to (or can’t) borrow from another envelope, the system automatically reduces available funds from next months allocation. That’s rule #4 in action.
So, after three solid months of using YNAB, I knew without any doubt this would be the way I budget for the rest of my life. However, as wonderful as YNAB is, there are some limitations since it’s based on MS Excel. Basically, since it’s not automated, you end up doing all manual entry of transactions. I’m pretty lazy by nature and I like to automate anything that saves time or makes my life easier.
Thankfully, another bonus I got from Jesse was a free copy of the ebook, Money for Life. In addition to being a very entertaining and educational story, it also turned me on to another envelope budgeting system known as Mvelopes.
After spending a few days studying the Mvelopes sales material, reading reviews, and lurking in the user forums at the company website, I had to try it. I discovered that Mvelopes is an online system that is almost 100% automated. It wasn’t specifically designed to utilize the four rules that Jesse pioneered over at YNAB, but I saw that it could be used in almost the exact same way - quite easily in fact.
After consulting with Jesse about my decision to try another budgeting product, I took the plunge on March 1 and enrolled in the Mvelopes 30 day free trial. I mean, what the heck… It’s free - why not give it a test drive?
Signing up and getting my accounts added to the system went quite smoothly, but the next 3-4 days were a little bumpy. The learning curve isn’t terrible, but if you’re used to Quicken like I am, Mvelopes is a whole new way of thinking about your money. I also had a little trouble with Mvelopes not downloading my bank transactions, but tech support got that straightened out in a few minutes.
The cool thing about Mvelopes is that all your bank and credit card transactions download automatically, and then you simply click-n-drag them into the appropriate envelopes. The system deducts the transaction amount from the money previously funded into the envelope based on the spending plan you created during setup.
Another great feature is the Net Worth screen that displays your financial big picture in real time. I never thought I’d care that much about my net worth, but I love pulling it up to see how well we’re doing.
We’ve already been able to increase our average bank balance by at least 10% simply by knowing and controlling where all our money goes. And our net worth is literally increasing each day as we pay down our debts with a laser-like focus.
It’s now March 23 and we’ve been using Mvelopes for almost a full month. I can tell you with 100% conviction and certainty that I will NEVER again be without a budgeting system like Mvelopes! I wasn’t keen on the idea of paying a monthly fee for a service like this, but now that I’ve experienced it, I would gladly pay double the current price. It’s worth SO MUCH more to our financial bottom line.
Now, I can’t forget the great debt of gratitude I owe Jesse and YNAB for putting me on the right path to budgeting success, and I won’t ever be able to repay him for that. In fact, if he ever decides to come out with a new product or service that competes more closely with Mvelopes, I’d definitely consider switching back to YNAB! 
So there you have it…the Holy Grail of Budgeting is no longer a closely guarded secret. I realize envelope budgeting isn’t a new idea by any means, but doing it effectively in our modern, almost cashless, society is another story. Do yourself a favor, go check out YNAB or Mvelopesand get started with one of them.
Personally, for the small cost of YNAB, I recommend doing it the same way I did it because the education you’ll get from Jesse is worth 100 times what you’ll pay for the spreadsheet. Once you’re comfortable and understand how everything works, you can always try out Mvelopes if you desire a bit more automation like I do.
Please don’t just read this and do nothing. TAKE ACTION NOW to begin increasing your level of financial fitness. It’s not difficult at all, and can actually be a lot of fun!
Oh, I almost forgot, PCWorld.com recently wrote a nice review of Mvelopes and gave it a very good rating.
EDITOR UPDATE 04/2007: Since this post was written, Jesse released YNAB Pro which is no longer Excel-based. As of March 2007, YNAB Pro now imports transactions from pretty much any bank using a variety of industry standard file formats. It’s not fully automated like Mvelopes (yet), but it sure is a HUGE improvement!