Why We Approach Financial Planning and Budgeting Differently

Picture of Jesse Mecham, founder and CEO of YNAB.
Jesse Mecham, founder of online budgeting tool “You Need a Budget.”

Disclaimer: Neither the author, nor Providers & Families Wealth Management, LLC or its employees, are affiliated with, compensated, or endorsed by You Need A Budget (“YNAB.”) This is not an endorsement of YNAB and should not be read as such.

On his company’s website, Jesse Mecham (founder and CEO of online budgeting tool “You Need a Budget,” or YNAB for short) explains in his like-titled book how budgeting and financial planning are different:

If it is impossible to perfectly predict your expenses, a budget needs to be nimble and adaptable, right? Except most budgeting systems are decidedly “set it and forget it.” You make a budget at the beginning of the month, set it in stone, valiantly try to bend the fates and laws of the universe to make the month turn out exactly like the numbers you guessed, er, projected. Oh, and then beat yourself up and feel guilty when it doesn’t.

In retirement planning, “forecasting” is very useful. We forecast what we will spend, how much things will cost, and how much more expensive they’ll get over time. We even forecast how are investments will perform, even though there’s no guarantees.

Related: Yes, You Can Keep a Budget

When it comes to budgeting, forecasting is much different. If we forecast what we’ll have, we’ll forecast how we can spend it, and often make the mistake of spending it now. This is why YNAB’s approach to budgeting is so unique: you only focus on what’s in your bank account today, and you split it up into bitesize pieces designed to accomplish its own tasks.

Budgeting is a fluid, active process that requires dilligence and awareness.

Most budgets are backward. You start by projecting or guessing what your income will be, then plan how to spend that money. The farther out you go with this exercise, though, the less accurate your guesses–about your income or your expenses–are going to be. (Go ahead, I dare you to try and perfectly predict your expenses even for a week). The result? You are always in the dark, guessing, and waiting for the other shoe to drop.

With YNAB, you only budget money you have right now. It’s an allocation system, rather than a forecasting system. Therefore, you are on solid ground, fully aware of what you have and where you are going.

What about that big bill next month? Slow down, we aren’t there yet. With YNAB’S approach, we focus on what are current money is doing. And if it our current money isn’t helping us achieve our objectives, then we need to rework it.

Check out YNAB for yourself here.

About the Author

Scot Whiskeyman is Founder and Partner of Providers & Families Wealth Management, LLC., and is a CERTIFIED FINANCIAL PLANNERTM . His primary focus is on retirement planning for established professionals and estate planning for seniors. He can be reached by e-mail at scot@providersandfamilies.com.

Welcome To Your First Day of Financial Independence

Fun fact: Mario is always happy and confident because he doesn’t spend any of the coins he collects.

When I was a kid, all of the joy I got out of life came from simple things. Two of those things were a pencil and a piece of paper. I loved to sketch – I would sit on the couch in my living room with a TV tray and recreate the room. I’d often create concept art for video games – sometimes for games I played, other times for games I dreamed of creating. I’d spend hours creating comics with my own heroes and villains.

My childhood was not fraught with the newest gadgets.  But don’t get me wrong: I had, and loved toys. It’s just that my parents earned modest livings. Some things I got – stuffed animals, action figures from yard sales, cheap matchbox cars every now and then. As for getting the expensive things – they taught me that I needed to save. I earned a weekly allowance by doing household chores – vacuuming, polishing furniture, and sweeping the stairs. It was only a few dollars per week, but I eventually saved up enough money to buy my biggest purchase in my life: a Super Nintendo.

What kept me going was my powerful vision of owning a video game console. When I closed me eyes and imagined it, I could feel it. Nothing was going to stop me. Sure, I wanted it now, but “now” wasn’t an option. Working was. Dreaming was. So I worked and I dreamed, continuing to create imaginary video game levels with a pencil and paper.

As kids, we find creative ways to keep ourselves entertained. We don’t always get exactly what we want, and we certainly don’t get it when we want it. We have to wait. We have to work. We have to have patience. And even then, sometimes our patience doesn’t pay off. But we move on.

Then we become adults.

We place value on the stuff we own. The difference is that stuff as kids meant fun. Stuff as adults means status. Think of it: the brand new, shiny black Mercedes. The five thousand dollar engagement ring. The brand-name suit or dress. Is it realistic to afford these things? For the average person, no. So companies offer payment plans, and accept credit cards. And we cough up the money any way we can, because we’re convinced that owning stuff is what defines success.

We all know the truth: people don’t die regretting never having gotten to own a luxury sports car. They don’t spend their final moments wishing that had bought a bigger house. People look back at their life and wish they had spent more quality time with loved ones. They wish they had spent less time caring about how other people saw them, and more time pursuing their creative passions. No one dies wishing they had owned more stuff.

It took me years to understand this. Throughout my twenties, I thought being successful meant being someone else’s brand of success. So I wasted money on expensive bar tabs, restaurants, clothes, and household items that became nothing more than clutter. None of it led to happiness…..it just led to tons of credit card debt. Until one day, I had enough. I cut up my credit cards, and threw them in a shredder. And that worked, for a while. Until I got new credit cards in the mail. I threw them in a drawer, “just in case.” It wasn’t long before I was back at bars and restaurants swiping the cards again. Not the “just in case” I planned for.

Read Also: Yes, You Can Keep A Budget

The reason I failed was because I hadn’t solved the problem. My problem was the entire way I was thinking about money and success. First, I held the semi-unconscious notion that superficial experiences at bars and buying things would pay for themselves (although I had zero notion as to when.) The second was that because I had graduated from business school I was now entitled to financial independence that I had not earned. The truth eventually hit me: those that have achieved financial independence don’t buy things and let them “pay for themselves,” they buy things, and they pay for them with money they already have.

This new mindset has allowed me to draw a clear line between what’s necessary, and what isn’t. And it doesn’t mean I have to sacrifice my lifestyle. I count myself fortunate to live in one of the most wasteful societies in the world. You’d be shocked at the things people literally just throw away: cherry cabinets, flat screen televisions, washing machines, wooden end tables, books, and more. All of which can either be used, or converted to cash, which can they be spent on something useful. The reason more people don’t take advantage of other people’s wastefulness? Two reasons: first, they aren’t trained to look. Second, they can’t swallow their pride. There is a shame that goes with being middle class and not spending money. It’s almost expected. The trick to getting around this is to remember this: your money, your choice. No one pockets money to make it sit there and collect dust. We do it to achieve financial independence.

We can’t be financially independent if we pay companies interest on overpriced stuff that loses half its value in the first year we buy it. We can’t be financially independent if we spend money because of others’ perceptions of us. These things are the opposite of financial independence. I’d even just call them “financial dependence.”

Financial independence begins with a mindset, and ends as accumulated wealth. You can begin enjoying financial independence today. How? Think about your budget. What can you give up now – something that is taking your money? The cable bill? The brand name cereal? Even if it’s only an extra dollar you keep in your pocket, that extra dollar is yours. With the mindset of financial independence – keeping more of your money, and spending less – that extra dollar will become lots of extra dollars.

If you’re scared, my advice is this: stop tying your identity and sense of self worth to the stuff you own. It’s a never ending game with rules that are constantly changing. At the end of the game, somebody else is rich, and you’re still working at age 70.

Being financially independent means not depending on what your financial status means to others. Again: your money, your choice. You earn it, don’t you deserve to decide what you’re spending it on?

A final note: you can’t undo yesterday’s bad spending habits. You (likely) can’t just erase all of your debt and have a million dollars in your bank account. But it doesn’t matter, because that’s not what financial independence is. To be financially independent, you just have to accept an obvious, but easy to overlook truth: money can’t buy happiness. You already know this. Now it’s time to live it.

Forgive yourself for your past mistakes, and fight to keep the money you bust your ass to earn. Enjoy the simple things in life – the ones that don’t require money (there are plenty!) Welcome to your first day of financial independence.

Do you agree? I’d love to hear your thoughts – comment below!

About the Author

Scot Whiskeyman is Founder and Partner of Providers & Families Wealth Management, LLC., and is a CERTIFIED FINANCIAL PLANNERTM . His primary focus is on retirement planning for established professionals and estate planning for seniors. He can be reached by e-mail at scot@providersandfamilies.com.

Accomplishing Your Financial Goals by Weighing Each Part

A man walks into his doctor’s office for his annual checkup. After checking his heart beat, taking his blood pressure readings, and flipping through his chart, the doctor breaks bad news to the man: that he’s got to lose some weight, or suffer some serious health consequences very soon. The man, very annoyed, explains to his doctor that he has tried to lose weight, but “nothing works.” He eats a salad for lunch every day. He cut out soda and beer. He has vegetables with every meal. It’s just genetics!

Not so fast. Further prompting from his doctor reveals the problem: the man dumps croutons, breaded chicken, and ranch dressing on his salads, making them no better than a fast food sandwich – and he does this daily. The vegetables he eats are always accompanied by high calorie dips. And his daily snacks of ice cream and M&Ms add nearly 1500 calories to his daily intake. Turns out they’re more than just a treat – they make up half his diet.

For anyone who cares about their health, filling in the blanks is easy: calories in > calories out. For this man, it’s confusing. He eats vegetables and some sweets, so what?

A good habit does not cancel out a bad one. When it comes to accomplishing one’s goals, the summation of all of his actions are what results in the consequences, whether desired or not. It’s not the lettuce that’s the problem, it’s the deep fried chicken and carb loaded extras on it.

The same is true when it comes to money. It’s not saving money that’s the problem, it’s avoiding wasting it. Would lower interest on my credit card help? Sure, but if I keep swiping it to buy useless junk, how much will my balance decrease?

Successful people look at how their individual financial habits impact their financial situation as a whole. By addressing their financial situation in parts, they feel more empowered to make real changes for the better.

Consider your financial situation and it’s parts. What can you cut out of the budget, however tiny? How much extra change can you throw into savings, or at your credit card balance?

Whether it’s improving cash flow, saving for a vacation, or paying off a credit card, big change happens when the weight of each part is tackled bit by bit. Cutting out croutons from a salad can reduce it by hundreds of calories. Give it time, and the impact of cutting out croutons will speak for itself. The same is true for your bottom line.

How To Save $20,000 on Student Loans

After 10 years of repaying my biggest student loan, here’s what I had to show: $18,000 paid towards interest, and $5000 towards principal. As if that weren’t enough, the institution that serviced my loan has continued to raise interest rates over the past 4 years. And that increase has risen in frequency since interest rates started rising.

Sound familiar? With interests rates steadily climbing, now is a great time to look at refinancing high interest student loan debt.

 “You’re Not a Loan”

In 2010, I tried to refinance this loan, but my short credit history and lack of savings at age 24 resulted in me being denied by the credit union I was looking at. Fast forward 8 years and nearly $20,000 in interest payments, I thought I’d check into refinancing again – there wasn’t much more to lose than I already had.

In researching potential refinancing options, I stumbled across CommonBond. Started in New York City by 3 Wharton MBA grads in 2011, CommonBond takes a different approach towards student loan debt. Unlike many banks, they aim to make it simple, transparent, and fast to refinance student loans. Not only that, but they have some extremely competitive fixed interest rates.

Their slogan “You’re Not a Loan with Us” is catchy, and seems to be their philosophy about how to treat borrowers. CommonBond’s staff is made up primarily of millennials, many of whom are burdened with student loan debt of their own. They clearly know their audience, keeping their language simple and straight forward, and offering telephone, e-mail, and website-based chat as options for communicating with them.

Explore Your Options

It’s not uncommon for large financial institutions to require high credit scores before they’ll consider refinancing your loan. CommonBond only requires a credit score of 650 or higher. Obviously, the higher your score, the more favorable the loan terms will be. For those that have a few red marks on their credit report, you may need to make use of a cosigner – but let’s face it, if you managed to snag a private student loan during your undergrad years, you probably already have one.

A Word of Caution

Saving money is great, but it’s important to remember that federal and state lending programs often offer favorable terms for repayment that private lenders don’t – including but not limited to deferment, forbearance, income-based repayment, and forgiveness. If you’re in an income-based repayment program, your monthly payment could jump dramatically by refinancing with a private lender.

The Bottom Line

Since refinancing my biggest private loan through CommonBond, my interest rate dropped by nearly 3%, and is now fixed instead of variable. Refinancing will save me $21,000 by the time my loan is repaid.

When’s the last time you looked into refinancing your student loans? Now is the time to check again. You’ve got a longer credit history – and new lenders are surfacing, disrupting an industry dominated primarily by banks.

Tip: you can get started with refinancing by checking out Student Loan Hero’s top 6 lenders of 2018, which is how I found CommonBond.

Note: the author and Providers & Families is neither affiliated with nor compensated/endorsed by either Student Loan Hero or CommonBond.