In a nutshell: By diligently applying four simple rules, you can move from being at the mercy of money to being a master of money.
In 2004, Jesse and Julie Mecham were twenty-year-old newlyweds trying to make ends meet. They lived in the 300-square-foot basement of a sixty-year-old home. He was pursuing a master's degree in accounting, while she was finishing a bachelor's degree in social work. Plus, they were planning for their fist child.
The Mechams felt flat broke.
But because Jesse was (and still is) a self-proclaimed “numbers nerd”, he decided to create a spreadsheet to budget for every day of the year. The couple steadfastly stuck to their budget, and something surprising happened. Despite their meager circumstances, they no longer felt desperate about money. They paid their bills and still had a little left over for a couple of date nights each month.
Later, while brainstorming ways to earn extra money, Jesse wondered if other people would be interested in his budgeting method, which involved four simple rules. He started teaching others these rules and sharing his spreadsheet. In time, that spreadsheet morphed into a piece of software called You Need a Budget [my review].
Today, You Need a Budget is one of the most highly-regarded personal finance apps available. (Seriously. Everyone who uses it seems to love it. Its users are die-hards.)
In his recent book — also called You Need a Budget, naturally — Mecham shares the method that has helped him (and thousands of others) overcome financial anxiety. Let's take a quick look at the YNAB method.
Note: Throughout this review, I've embedded videos from the YNAB YouTube channel. While these videos contain great supporting material, they use slightly different terminology from the book. Not a big deal, but I thought you should know.
Rule One: Give Every Dollar a Job
The first step to building a better budget, Mecham says, is to give every dollar a job. Ask yourself this fundamental question: “What do I want my money to do for me?”
Before you can give every dollar a job, though, you have to know which “jobs” need doing. Begin be listing all of the places your money needs to go — your obligations, the expenses that cannot be ignored.
For most folks, these top priorities will include housing, utilities, transportation, and health care — survival stuff.
Once your essentials are covered, the hard work begins. Now you have to “prioritize your priorities”. After you've set aside money for your needs, you can do whatever you want with the money that's left. Want to travel? Use your money for travel. Want to buy new shoes? Buy new shoes. Want to upgrade your car? Upgrade your car. “Take time to think about what makes you happy,” Mecham writes, “and add those things to your budget.”
Again, you're trying to answer the fundamental question: “What do I want my money to do for me?” First, you want it to cover survival basics. Next, you want it to help you enjoy life.
“Before you can start bossing your dollars around…you have to decide what needs to get done. You're literally writing a to-do list for your money. If you've never done something so proactive with your money, you'll quickly see how it changes your perspective on each dollar you hold.”
Rule Two: Embrace Your True Expenses
What about irregular expenses? That's where You Need a Budget‘s second principle comes in. After you budget for essentials but before you budget for the fun stuff, Mecham advocates setting aside money for what he calls “true expenses”.
These “true expenses” don't show up as regular, monthly obligations. They take two forms:
- Predictable expenses include things like your auto insurance or home insurance, which might be paid once or twice each year. They also include stuff like electricity bills (which might spike in summer and/or winter) or holiday gifts and trips.
- Unpredictable but inevitable expenses are those curveballs life throws you: The transmission fails on your car, your 12-year-old dog needs surgery, you discover dry rot in the attic.
It's these true expenses, Mecham says, that derail most budgets. The average person is great about setting money aside for necessities and, especially, for the things they value in life. They're not so good at remembering to account for periodic insurance payments. And they're terrible at planning for the unpredictable but inevitable obstacles.
With his second rule, Mecham is trying to get reader to think long but act now. This can be tough for some folks. This sort of budgeting and saving feels like sacrifice. It's not. You're absolutely getting something you want — but it's something you want or need in the future, not today.
“Every time you choose to put money toward a long-term priority,” he writes, “you're literally spending money ahead to the future, setting Future You up for success.” Amen!
“Rule Two gets you to be proactive with your money on a much deeper level than you've ever experienced. When you think long and act now, you're not just looking at your immediate bills — you're seeing the bigger picture and you're hyperaware of all your expenses. Your spending doesn't surprise you anymore…”
Rule Three: Roll with the Punches
Even if you give every dollar a job and embrace your true expenses, your budget is going to take some unexpected hits. “There's a difference between a plan and real life,” Mecham says. “If you obsess over sticking to the plan…despite any consequences, you're sure to be stressed and unhappy.”
The third rule of You Need a Budget is all about making adjustments based on whatever comes your way. Because your budget is a plan that reflects your life and priorities, your budget should change as you life and plans change.
Rule Three is also about being completely honest with yourself about what's truly important. Mecham conveys this concept with a story from his own life. For a decade, he and his wife overspent their budget grocery nearly every month. They kept setting optimistic targets, then missing wide. Eventually, his wife got frustrated. “I do not care what a can of corn costs,” she told him, and something clicked. They bumped their grocery budget to something more realistic.
Rolling with the punches is also about dealing with the completely unexpected stuff life throws at us. Imagine your garage door breaks, Mecham suggests. “The day before it broke, replacing the garage door was not a priority…The day after? Darn close to number one in [the] budget.”
The bottom line? Changing your budget is not failing. Neither is missing your targets. Don't let it get you down. Roll with the punches. That's budgeting in real life.
“Change is so important that we've dedicated an entire rule to it…Rule Three is what will save you when all other budgeting apps, experts, and programs make you feel you've failed the moment you stray from the original plan. It's what pulls your budget out of a spreadsheet and into the real world.”
Rule Four: Age Your Money
The first three rules of the You Need a Budget method create a framework that allows you take charge of your money, to control it instead of letting it control you. If you follow these rules, you'll find that you gradually move from feeling pinched every month, to having enough, to eventually generating a surplus of cash. Rule four is about building a stockpile of cash so you have enough saved to cover your expenses for a very, very long time.
To explain this rule, Mecham introduces the idea that money has an “age”. He writes:
Money's “age” is based on the gap of time between when you earned the money (money in) and when you spend the money (money out). If the money you're spending on Tuesday was deposited on Monday, your money is one day old. If it's Friday before you're spending that money you deposited on Monday, then you money is four days old.
Your goal should be for your money to be as “old” as possible when you spend it. Mecham urges readers to aim to age their money for thirty to sixty days, but reminds us that five days is better than one — and one is better than zero. “Just keep working on increasing the time between receiving money and spending it.”
(He also notes that if you're in debt, then the age of your money is negative. You've spent money that you haven't even earned yet.)
Mecham says that living off “old” money can feel like a pipe dream if you're living paycheck to paycheck. It can seem like a luxury reserved for the super-rich. From his experience, that's just not true. As you apply his rules, he says, you'll move from having a stack of bills waiting for money to having a stack of money waiting for bills.
You Need a Budget is a simple book, but it's excellent. It doesn't try to throw the entire world of personal finance at you. It's laser-focused on one thing: building a better budget. (And I appreciate that Mecham doesn't use the book as a platform to pitch the You Need a Budget software, which is how he makes his living.)
The book includes chapters on budgeting as a couple, slaying debt, teaching kids to budget, and what to do when you feel like quitting. It's also peppered with examples and real-world stories (some of Mecham's own family) to illustrate the You Need a Budget philosophy.
Because Mecham has been reading and writing about budgets since 2004, he's learned a lot about what works and what doesn't. He's constantly receiving feedback from the tens of thousands of people who follow his program. This book is a culmination of that experience, and it shows. If you need a budget, I highly recommend this book.