Familia, I can still remember how stressful it was to be broke and living paycheck to paycheck as if it were yesterday. Don’t even get me started trying to budget, just to buy cheap mojitos on happy hour! Yet, soon after getting married, my wife and I changed the way we budget and paid off over $92,000 in debt in less than four years!
Here is how we pulled it off:
Prior to getting married in May 2014, Kendra and I individually budgeted in ways our brains understood. Once her and my money became our money, we struggled to find an effective compromise between our different approaches. Since we had $41,000 in student loan debt, $30,000 in personal loan debt, and $21,000 in a Home Equity Line of Credit, we looked for a system capable of helping us eliminate debt as soon as possible.
This is where You Need A Budget (YNAB) came in. Compared to Mint or other budgeting software, YNAB offered us both a budgeting tool and a philosophy on how to spend our money based on The Four Rules.
Rule One: Give Every Dollar a Job
Rule One is all about dealing with the now. It’s about prioritizing and living out your values in your budget.
According to YNAB, you budget to zero. You give every single dollar currently in your account a job for current and future expense categories. Then spend money according to what’s in a budget category, not the pool of money in your bank account.
This rule was life changing for us. Rather than looking at our checking account and seeing money to splurge at the end of the month, Rule One helped us see how our money had been divided into several categories, and track what we had already spent on our credit cards. Thus, when we looked at a category like “Eating Out” and saw only $5 remaining, it helped us avoid overspending. Instead, we would prepare a delicious meal at home.
Rule Two: Save for a Rainy Day (also known as Embrace Your True Expenses)
I used to get majorly thrown off by unexpected expenses like car repairs. I also got thrown off by semi annual insurance bills and needing to buy Christmas gifts–you know abuela likes to get a new rebozo every Navidad!
YNAB helped us prepare for these irregular expenses by designating money to them each month to build mini-savings pools. We set aside a small amount towards car repairs, insurance and Christmas gifts each month. When those expenses arose, they didn’t throw off our loan repayment goals.
Rule Three: Roll with the Punches
One of the reasons budgeting did not work for me very well prior to YNAB was due to my budget’s rigid nature. On an Excel spreadsheet my income was allocated into various categories (e.g., $250 for groceries, $100 for transportation, $50 for entertainment), which made it seem like I could only spend the same amount of money in those categories each month. What’s more, when I overspent on a category or something unexpected came up, I would feel like a failure and sometimes sabotage myself by spending even more money.
With Rule Three, Kendra and I simply learned to roll with the punches. When things changed in our budget, we adjusted by pulling money from another category to cover it. For example, this past January, we celebrated El Dia de Reyes (Three Kings’ Day) with 50 family members and friends. Cooking for everyone and buying two giant Rosca de Reyes completely blew through our grocery category for the month. However, we had surpluses in other categories and were able to compensate for the overspend without a worry.
Rule Four: Live on Last Month’s Income
The premise of this rule is to spend this month what you earned last month. How? Save enough money to go an entire month without touching your regular income. This is one of the most powerful tools for staying out of debt and dealing with the unexpected.
While this was very attractive to us, we were only able to live on last month’s income 20 months after we started using YNAB. Given our substantial debt, a significant portion of our monthly earnings went to debt repayment, which did not leave much money for creating a buffer. Nonetheless, we made sure to save a small amount of money every month. By December 2016, we made our last loan payment and also had enough money to fund all of our expenses for January 2017.
We can attest the hard work and diligence are worth it! Living on last month’s income is amazingly liberating. We no longer feel financially stressed. We can also seriously contemplate not working full-time to spend more time with each other, our newborn son, and family and friends.
The Bottom Line On Budgeting: Make It Work For You
Budgeting is a practice my wife and I highly value. YNAB costs $50 per year (it also offers a 34 day free trial), and we definitely get our money’s worth. Thanks to The Four Rules, we were able to become debt free and start living on last month’s income. We hope even if you don’t use YNAB, these four rules can still help you budget and achieve whatever financial goals you’ve set for yourself.
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Daniel Perez is a high school social worker and huge money nerd! As a Mexican immigrant who grew up in poverty most of his life, he loves learning and teaching others about sound financial management skills. Kendra Perez works at a healthcare startup. She is an immigrant from Canada and studied Spanish at the University of Minnesota.
