Many years ago I used Microsoft Money, so when I recently looked for a personal finance app, I was surprised to find Microsoft end-of-lifed the product. Even more odd was that nothing seems to have come along to replace it. It seems that building an app to
track personal finances should be relatively easy, and I’m sure many
programmers would have noticed that it’s a “point of pain”, so why isn’t there
anything really good out there?
A bit of digging revealed that there are a couple of good apps, like Mint, and
some of the other spending trackers from the banks. Though many of them are region centric, so if you're not in the US or the UK, you might be out of luck. One of the leading
independent apps appears to be YNAB, and it’s great for what it is, but it’s
not a full featured personal finance application. I now use YNAB (much more on this later).
The problem may be that there are several distinct
activities that I want from my PFM (personal finance manager), and these
activities get confused all the time. There isn’t a convention that I know of
for what these activities are called, so for now I’m calling them Tracking,
Budgeting, Planning, and Cashflow Planning.
Tracking
Tracking is pretty simple – you just record all your
transactions, add some meaningful categories, and at the end of the month you
can look at how much you spent in each category. This was the way I used
Microsoft Money a lot of the time. When I was using it, the mere fact that I
was tracking everything and analyzing it regularly had a definite impact on my
spending. I was much less likely to spend on trivial things. I understood that
my bank balance was just a number, and the real picture could only be seen when
all the commitments that money had to serve were taken into account.
Tracking is the least complex feature of a PFM, and it
probably delivers you the bulk of the benefits. Mostly because you’re forming
the habit of regularly analyzing your spending, and breaking the illusion that
the cash in your bank account is money you can spend. Perhaps part of the
reason that there aren’t too many good apps out there is that this is easy
enough to do with a spreadsheet, and many banks and credit cards now offer this
kind of view of spending.
Budgeting
To most people, this means writing down all the transactions
you think are going to happen in the next month or longer. Then you either try
to reduce some (if you don’t have enough money to cover them), or you see that
you’ve got enough money and you’re done. Then at the end of the month you check
that you’re within budget (you are almost certainly not), then you feel bad for
a bit, resolve to do better in future, and eventually give up budgeting.
Until I used YNAB for a while, I didn’t realize that my idea
of budgeting was nothing like true budgeting. YNAB is a software version of the
old “envelope” system, where back in the days of paper paychecks and using cash
for everything, the thrifty household would cash their paycheck, then put
amounts of cash into envelopes labelled with the categories they were for. An
envelope for Groceries, one for Heating Oil, another for Clothing and so on. If
you were looking further out, you might have one for Christmas, and another for
the Vacation you were planning for next year.
There’s a certain genius to this system, and more than any
other, it forces you to break the delusion that the cash you have is the cash
you can spend. Even better, if you do spend too much on something trivial, you
have to physically take cash out of one of the other envelopes to do it; and it’s
kind of tough to let yourself take money out of the Kids College Fund or
Vacation to go bowling.
YNAB is a very opinionated piece of software (a good thing I think). It’s tough to
learn how to use it in the intended way without spending a lot of time reading
the docs and watching the excellent online videos. I’m thankful I stuck at it, I
don’t think I would have ever really understood what budgeting means otherwise.
That’s probably why there seems to be a steep learning curve for such a simple
piece of software – it forces you to look at budgeting a different way.
Planning
I’ve grown to respect the YNAB approach and I hope I’ll
always see budgeting in this new powerful way. However, I also need to plan.
The YNAB way is that you don’t allocate money to any category until you
actually have that money. So when you’re starting out, you rarely budget more
than 1 month out. So let’s say you get paid on the 1st of the month,
and your mortgage payment is paid on the 2nd of the month. In the
YNAB budget view, you don’t show that mortgage payment on your budget until you
have the cash for it. Now I get why this is right, and I get that forcing you
not to budget until you’ve got the cash is the best way to be realistic and
build up a proper buffer so you’re paying this month’s expenses with the
paycheck from a month or two ago.
But. I also want to be able to see a plan or a projection of
those transactions. It’s important for me to think beyond the next month and
remember that I pay my car insurance annually in March, and that’s nearly 700.
In YNAB, the way you deal with this is by creating a category / envelope for
car insurance and put enough into it each month so you’ll be able to pay the
700 in March without screwing up your cash position. That’s fine. But there isn’t
anywhere in YNAB where you can see that car insurance of 700 is due in March,
and property tax is due in April, and school supplies are due in September, and
so on.
I also need a planning system that helps me make big
decisions. Like what happens if I switch jobs to something that pays less? A
short term budget doesn’t give me what I need here. Should my wife go back to work?
What happens if my son gets into an expensive school? These questions require
plans that go months and years into the future, and sometimes, the output is
along the lines of “get a second job or a big promotion buddy, you need way
more cash”. And that’s ok (I’ve done this in the past, many people do), but we
should have tools that make it easier to explore the what-if scenarios.
Cashflow Planning
I also need to resort to a spreadsheet in order to figure
out how much cash I’m going to have in my checking account, my family joint
account, and what the balance is going to be on any credit cards we use. The
purist budgeter approach is that this stuff doesn’t really matter – you have
income coming in, when you receive that income, you allocate it to your
expenses, and when you pay those expenses, it doesn’t matter which account it
comes from, what’s really happening is income is being moved to outflows.
Again, this took some getting used to, and when it finally clicked,
it made a ton of sense and I can see why it’s the right way to think when
budgeting. But. I still need something that tells me when our joint account
needs to be topped up so it doesn’t go overdrawn. It would be nice if I could
see when that was likely to happen, and since I can input the expenses I’m
going to be paying this month and next, along with the dates and amounts, I’m
pretty sure the computer could do this for me.
More urgently, when you first adopt YNAB, you’re probably
living paycheck to paycheck. In fact, you’re probably living off next month’s
paycheck, i.e. spending on a credit card and then paying it off when you get
paid, then repeating the cycle. While you work to fix this, and move to living
off income you already have in the bank, you really need help managing your
credit cards. The most urgent question being: which expenses should I pay with
my credit card this month, so that I don’t put my checking account into
overdraft? Some expenses can’t be paid with credit card, so it’s not good
enough to say that you pay everything out of your checking until that’s used up
and then switch back to credit.
Overspending and
Amendments
When you overspend in YNAB, or you add an item to your
budget mid-way through the month, you overwrite the budget with this new
information. There’s no way to see what your original budget was versus how
reality ended up. Other users have pointed this out, and the YNAB response is
that it’s just the right way to do things. I think it may be ok to display the
current budget without all the clutter of what the original amounts were, but
the app should show you how often you underestimate categories and by how much,
and how often you completely omit items. Then, when you’re budgeting next
month, a helpful tip would be text like “You underestimate the total budget by an
average of 15% each month, and regularly overspend in Entertainment by 50%”. I
think it would also be a helpful discipline for the user to be asked to “declare”
that a budget is final. As it is now, it’s too easy to keep tweaking and there’s
no way of tracking what the original intent was.
The Huh…? Factor
The first months I used YNAB, I entered every transaction
diligently, I allocated my income, I amended my overspending as recommended,
and I created a buffer category to start building toward living off old income.
I also cut back on a lot of spending, making pretty significant changes to get
things under control. But when I put all this in YNAB, and looked at the
reports and the budget screen, I had no clue what it all meant. Was I doing
well? Did I have enough cash to cover my main expenses next month, assuming I
got paid as usual? I had no idea, and I still think it’s tough to see. Yes, you
need to stop thinking of the cash in your bank account as the money you can
spend, but it would be nice to be able to move into “budget space” in YNAB, and
then have it translate back into “cash and time” space. Putting it simply, if I
give the computer my current balances, all the upcoming transactions with dates
and amounts, it should be able to tell me what my balances will be in future. I
know this isn’t budgeting, but it’s an important part of what I want from a
personal finance app, and if I find another app that does this, I’m less likely
to enter my transactions and projections into both YNAB and that new app.
Commitments, Covered,
Discretionary
In a budget app, I’d like to be able to label some future
expenses as “Hard commitments”. These are things I’m legally obligated to pay,
like rent or mortgage, my internet service, gym fees, anything where I’ve
signed a contract and I can’t just decide to reduce my spending in that
category in the short term.
When income comes in, the budget app should allocate to the
Hard Commitments automatically, in the order that they will have to be paid. If
there’s income left over, then I can use that to allocate to the discretionary
categories.
One solution to resolve the conflict between YNAB’s idea
that you only enter the expenses that you have income to cover, and the need to
do this to properly plan future cashflows, might to make it possible to enter
future month’s forecast outflows, but to clearly mark them as “uncovered”. When
income is allocated to outflows, they are “covered”.
So let’s say you’ve got no income yet this month, and a
couple of hard commitments in your budget for the month along with some
discretionaries. The hard commitments should be colored red, making sure you
can’t miss the fact that if you don’t get some source of funds to pay them, you’re
in trouble. The discretionaries can be colored amber, indicating that they’re
not covered. As income arrives, the hard commitments turn green, as do the
discretionaries. The commitments for future months stay red until you’ve got
the cash to cover them. This way, the budget view will eventually show you with
a month, or two, or three, with all categories in green, making it clear that
you have a buffer and how far into the future it reaches.
Hopes
The ideal outcome for me would be that YNAB adds functionality
to their app that makes it easier to plan and see a “cash and time” view of my
data. Or perhaps, other apps get built that can read the YNAB data files, so I
don’t have to have separate records. I love the way YNAB just uses dropbox to
sync and share the data files, and it looks like they’ve designed a good format
for the data. Maybe what we need is for this format to be made “open” or
somehow standardized by convention so that app developers can all read the user’s
data, no need to rekey or import.
I’m sure there are a bunch of great apps out there that I’m
totally unaware of, or perhaps the right thing is to get a professional
accounting package like Sage or Quicken and do all of this the way the pros do
it. Let me know what I’m missing!
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