my favorite budgeting programs, part 1: mint.com

Speaking personally, I can’t imagine what budgeting was like in the Pre-Computing Dark Ages. As it is, though, we now have plenty of tools to help keep us on track (though how well we use them is another matter entirely). For this week and next, I’m going to talk about my two favorite budgeting programs: mint.com and YNAB. (Yes, I’m quite familiar with Quicken, but it didn’t make the cut. If I ever get a reason to upgrade to the latest version, I may do a review on it; in the meantime, though, I’ll take a pass.)

So, what’s this mint.com thing? Mint.com is a completely online, free budgeting program. You visit the site through your web browser, give it your bank and credit card access information, and it automatically sucks in your transactions and balance information and presents it all to you in a very pretty format. You can then use it to track your spending, set goals, and otherwise get a handle on your finances.

The key word with mint.com is “automatic”. It was designed from the ground up to make personal finance as easy as possible: it automatically keeps up-to-date with your spending, auto-categorizes transactions as best as it can, sends you e-mails if your spending in a certain category goes over a specified amount, etc. etc. If you hate with a fiery passion the busywork of dealing with personal finances, you’re mint.com’s target audience.

It’s pretty awesome. The aforementioned good design and automation can make personal finance almost enjoyable; when I first got started with mint.com, I would pull it up just to look at the pretties. Automatically downloading transactions makes it less of a chore to actually track your spending, and the automated warnings you can set up can go a long way towards keeping you on your chosen path.

That said, every rose has its thorns. Automation comes with a price: the lack of mindfulness can keep you from really paying attention to where your money is going. All of your bank account information is stored on mint.com’s servers; while mint.com is extremely secure (like, a hacker would have to pull off a Mission Impossible or Sneakers-style break-in to get access), I understand if it makes you nervous for someone else to have that sort of info. Finally, mint.com is (now) owned by Intuit, makers of Quicken; this can be good or bad, depending on your opinion of Intuit, but the general consensus (and my personal experience) is that customer service isn’t quite at the level it was before the acquisition. So if a transaction goes missing or something else goes wrong…good luck. (That said, they’ve got tons of experience in dealing with extremely sensitive data, so there’s that.)

Bottom line? It’s a great program, especially if you’re in a good place financially and just want a program to do the dirty work of monitoring things. Plus, it’s free! However, if you need or want to pay closer attention to where your money goes, and are willing to be a bit more type-A about it, I’ll be talking about another program next week called YNAB (You Need A Budget).

How about you? Have you used mint.com, and if so, what has your experience been with it?

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yours/mine/ours

My friend Daniel Hope is presenting a marriage workshop series, and I was honored to give a talk on marriage and money at last week’s session. By all accounts, the most useful piece of that talk was a framework for setting up accounts that I call “Yours/Mine/Ours”, so I figured I should share it with the world at large.

Yours/Mine/Ours is a “middle way” between two extremes I’ve seen in the married world for handling shared finances. On one end, you can share everything between the two of you. It makes things very simple — everything goes in one pot, and everything comes out of one pot — but after a while, things can get…hairy. Maybe he has a habit of overspending on things she doesn’t care for. Or maybe he doesn’t want to spend money on anything, so she feels guilty any time she so much as buys new socks. (Modify genders as you see fit.) Resentment builds, and you either argue about it or, worse, you just don’t talk about it and let the pressure quietly build up to explosive levels.

At the other end, you can decide not to share anything, finance-wise. You have completely separate accounts, and you split the check for everything. Not only does this quickly get complicated — mortgages don’t really lend themselves to being “split” — but it doesn’t reflect reality very well. Does one of you really own all the groceries, and the other all the utilities? And of course this sort of arrangement precludes one spouse from ever leaving work (for example, to raise children).

Yours/mine/ours is a compromise between the two that looks like this:

As you can see, all income first goes into a joint account (“ours”). All shared expenses are withdrawn from that joint account (mortgage, groceries, utilities, child expenses). Also, at the beginning of every month, some amount is transferred into separate, personal accounts (“yours” and “mine”). This money is for individual spending; he can’t say boo about what she does with the money in her personal account, and vice versa. He doesn’t even have to be able to see into it.

This method has several advantages:

It heads off control issues. There’s no question as to whose money it is, or who is ultimately in control. Everything is “ours” first, then “yours” or “mine” second. This is especially key in situations involving disparate income, or where one spouse isn’t working at all; even in the situation where one spouse is a homemaker, this method makes it clear that they have an equal stake in the household’s finances. (And yes, each spouse should have an equal stake, if you want a strong and healthy relationship. Income is irrelevant.)

It’s relatively simple. It’s nearly as simple as sharing one account for everything; the only wrinkles are (a) an automatic monthly transfer from “our” account to “yours” and “mine”, and (b) the fact that you now use your personal account for personal expenses.

It gives each spouse their own space. Everyone needs space to be who they want to be, and this is no less true in the area of personal finance. The “yours/mine” accounts allow you to buy whatever you want, without having to run it by the other spouse. (Note: I don’t recommend attaching a credit card to a personal account. One spouse going into debt “on their own” is a great way to freak out the other one.)

It allows gifts to be that much more meaningful. When you buy a gift for your spouse using your personal account, it means something more than if everything were shared. I mean, this is money that was specifically allocated for your to spend on yourself, and you chose to spend it on your spouse! (Not to mention the fact that this allows for you to more easily surprise them, because they can’t see your bank statements!)

How about you? If you have a similar arrangement, let us know how it’s working out for you in the comments. (And if this kind of sharing doesn’t work for you, let us know that, too!)

can i afford this?

“Can I afford this?” How do you answer that question? If you’re like many people, you immediately think about your checking account, and whether what’s in it will last until your next paycheck if you purchase whatever it is you’re looking at. Alternately, you think about whether the monthly payments will push your “expenses” line over your “income” line. And that’s not bad — in fact, it’s miles better than the alternative many people followed before 2008, to whit: not asking the question at all. But as is so often the case on this little corner of the Internet, I challenge you with the idea that this is not the right question to ask.

This is no newsflash, of course. You can afford a lot of things! If your child (or your inner child!) asks you for a toy or candy, you can’t honestly say that you can’t afford it, can you? A buck or ten is hardly going to break the bank! But at the same time, you need some measure of determining whether or not spending the money fits in with your finances and your values.

Also, just looking at your checking account isn’t necessarily going to give you a clear picture. Yes, there’s some money in there, but how much of it is earmarked for groceries? Rent? Some portion of the auto insurance you’ll owe in October, or (ouch) the property taxes you’ll owe in December? If your financial situation is anything but the simplest, single-person steady-income scenario, you’re not always going to know the answer. And overdraft fees are a painful way to learn you were wrong.

Monthly payment plans — even at 0% interest! — can be even worse. If you sign up for a monthly payment that will go on for four years, only to find that your situation isn’t quite what you guessed it was or that you didn’t really want whatever it is you got, you’re stuck. And heaven forbid you actually want to make a change down the line — say, start saving for a vacation, or take a lower-paying but more-fulfilling job. Nope — you gotta pay that debt first.

No, “can I afford this?” doesn’t really work. A better question, as you’ve probably guessed, is this: “does it fit in my budget?” Suddenly, answers start becoming much clearer. If you have a budget for toys (or simply “entertainment” or “recreation”), then you can easily and simply answer the question “yes” or “no”. No guilt, no fuss, no muss; if you budgeted for it, why not buy it? You’ve already decided how much you value toys; by all means, follow through with that decision! And because each dollar in your budget has one and only one job, you know that spending money from your toy budget won’t affect your ability to pay your insurance or property taxes. A budget will also tell you how much of your spending is discretionary, which in turn will tell you if a given monthly payment will cause you to give up more flexibility than you’d care to.

The key, once again, lies in asking the right question. Picasso wasn’t just messing around when he said, “Computers are useless — they can only give you answers!” How about you? When it comes to making a purchase, what question do you ask yourself, and how do you answer it?

why budget?

Why budget? Have you ever asked yourself that question? The answer is more important than you might think.

For most people, it’s understood that you should have a budget. It’s like exercising or eating vegetables; it’s something everyone out of college feels they should do. But most people don’t, and I think it’s because they tend to fall into one of two categories. On the one hand, you’ve got the people who naturally make more than they spend; they’ve got money in their account at the end of the month, every month, so why worry about it? On the other, you’ve got the people who naturally spend more than they make; they’re going to have a balance on their credit card at the end of the month, every month…so why worry about it?

I totally get that. But it’s missing the big picture. And to understand the big picture, we need to understand something about money.

What is money? Forget Webster for a moment. Really, what is it? I like to think of it as “potential”. Potential for what, you ask? Potential for anything. Money can be converted into virtually any service, any item. It’s like a machine for converting the time you spend at your job into…well, anything at all. Each month — or every two weeks, or every time you close a sale, or every hour you work with a client — you get some of that potential. At that point, it’s entirely up to you to determine what you do with that potential, each and every dollar of it.

Do you start to see what I’m talking about?

Managing your finances isn’t some kind of pass/fail test, where the object of the game is to spend less than you make. That’s definitely very important, to be sure, but that’s not the point. The point is to manage your potential to its fullest — to put each minute of your time, each dollar of your money, to its best possible use. (And I’ll be the first to say that sometimes a Freebird’s burrito is its best possible use!)

And if that’s the point, then budgeting becomes the most obvious tool to get there. A budget tells you exactly what your priorities are, in numerical form; if you’d rather spend your money on X than on Y, then clearly X is more important, isn’t it?

In other words, budgeting means looking yourself in the eye and making a choice, rather than letting someone else — advertisers, peer pressure, and the various external forces that clamor for our time and money — choose for you. Is it harder than sticking your head in the sand and just hoping things will be okay? You bet.

But in my experience, it’s this kind of awareness that makes life worth living.

my own medicine: my experience with the envelope system

“Eat your own dog food.”

That’s one of Google’s Golden Rules, along with “don’t be evil” and “encourage creativity”. It’s a good rule: don’t create a product that you yourself wouldn’t want. (Edit: I changed the title of this post to “my own medicine”, because I didn’t want people to get the wrong idea about the envelope method!)

Along those lines, it occurred to me late last year that if you want to help people set up financial systems, chances are high that you’re going to recommend the Envelope Method to at least some of them — paying actual cash for the things they buy, rather than just putting it on their plastic and trusting to fate and Visa to sort things out later. But if you’re going to recommend something as counter to today’s culture as paying cash, you’re going to lose all cred if you yourself haven’t at least tried it.

So, after a surprisingly brief conversation with my wife, we resolved that, come 2011, we would try out this magical, mystical “cash” thing for ourselves. Most of the monthly bills remained on the (paid-off-in-full-every-month) American Express Blue Cash, as did some other variable spending items like fuel, but things like groceries, eating out, entertainment, clothes, household items — those all went into the envelopes.

It was probably one of the best decisions I made all year.

It makes sticking to a budget ridiculously easy. This is the “well, duh” one, but it’s true: you don’t have to rely on spreadsheets or your memory. If you want to buy something, just look in the envelope; if you don’t have the money, you don’t buy the thing. If we decided that we wanted to eat out a little more in a given month, we simply made a joint decision to move some money from one of the other envelopes. That’s fine — as long as the total in cash is the same, we don’t have to worry about eating into our bills or our Car Fund or going into debt.

It doesn’t mean you can’t shop online. Groupon accounts for a decent amount of our restaurant and entertainment budget. If we saw a Groupon we liked, we took the money out of the appropriate envelope, put it in the “deposit” envelope, and bought the Groupon. The contents of the deposit envelope were considered “spent”, and would be deposited back into our checking account the next time we went to the bank.

It’s more fun than you think! There’s something just plain fun about doing things differently from other people. Going to the bank and withdrawing your spending money for the entire month. Paying for a $50 (or $100!) pair of shoes in cash. Holding off on that impulse buy because you don’t have the envelope with you. Explaining to your friends just what the heck you’re doing with those envelopes full of greenery. Novelty is fun!

It empowers the non-finance-geek. In most households, there’s a finance geek and a non-finance-geek. In many, the geek ends up tearing their hair out trying to figure out how to get the non-geek to really internalize the budget. In extreme cases, the non-geek simply has no concept of a dollar; they nod and smile when the geek presents the budget, then go out and buy whatever they want, confident that the geek will figure out a way to make it work. The Envelope Method, however, is easy to internalize: you have the money, or you don’t. Suddenly, a twenty-dollar meal has a much more physical meaning — that’s one Andrew Jackson that you won’t be seeing again! In our house, once we set up the initial budget, I pretty much let Liz handle the envelopes — I ask for her permission before I take money out of one, or move money around, or what have you. Let me tell you: we’ve tried out several spending systems since we got married, and this has far and away been the least stressful.

In fact, I recommend everyone try the envelope method. Pick one spending category that you want to control — eating out, books, whatever it is — and force yourself to pay for anything in that category in cash. If you like it especially well, try expanding to other spending categories. At the very least, you’ll have that one category under control — and a handy tool in your personal finance toolbox to use later, as well.