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What your parents never taught you about money

By Nathan Lively

sound-design-live-money-parents-magnifying-glassDo you wish you had more control over your money? (Yes!)

Do you wish you knew where all of your money was going? (Double yes!)

You Need A Budget (YNAB) is the smart software that lets me figure all of this out for myself. To make sure I was getting the most out of it, I talked to Todd Curtis, their Chief Knowledge Officer.

What is YNAB, exactly? I wrote about it in this article, The Minimalist Guide to Budgeting (for Sound Engineers). You don’t have to read the article to understand this interview; the first part is all about budgeting and applies to anyone and everyone. Then there’s a bit of fanboying at the end for the hard-core YNAB users out there (I love you guys!).

sound-design-live-nathan-lively-phone-moneyNATHAN LIVELY: Every time someone asks me if I like YNAB I give an enthusiastic “Yes!”, but then I always have to explain that there was a big learning curve that probably has more to do with the fact that I never learned to manage my money responsibly than the software being overly complex. Would you say that’s fairly common?

sound-design-live-money-ynab-todd-curtisTODD CURTIS: Absolutely. Almost anything significant that we learn new as adults has a learning curve. As adults, we’ve collected all these thoughts about the way things should be, and we have to unlearn those things as much as we need to learn new things.

On top of that, people’s financial lives are complicated. There are a lot of moving parts, and we have a lot of issues like security and personal goals wrapped up in money. That’s where the stress comes from, but keeping a budget can remove that stress. We like to think YNAB—both the method and the software—does that easily. It’s just easier if you can forget what you think you know!

Understanding how to use money is just as important as language in surviving modern life. Why is our personal knowledge so lacking?

I love that analogy to language. But language is something we learn naturally—our brains are actually wired for language acquisition! Managing our money isn’t something we’re surrounded by from birth. So we each kind of grope around and try to develop our own solutions, which is too bad because in the end, it isn’t especially difficult to learn some strategies that can make a real difference.

More than one person told me that they bought YNAB, got started, then at some point stopped entering transactions and gave up. I bet this happens fairly often and I’m curious if you have any good strategies for maintaining momentum?

I think a lot of people give up the first moment they discover what they actually spend turns out to be different than what they expected.

Because if people have learned anything about a budget, it is that it is a rigid system. Make your numbers or else! As though you get a grade at the end of the month. But that mode of thinking doesn’t recognize that life is unpredictable, even though we all know that it is. When your plans change, your budget – which is just a plan for your money – needs to change, too.

What do you wish your parents had taught you about money? Or, if you could leave behind a collection of values for your children, what would they be?

Be intentional about your money. Set (and change when necessary!) clear priorities and think about how money can help you reach them—or not.

sound-design-live-money-parents-dollar-honeyWhat are the most common mistakes you see people make with budgeting?

Forecasting—budgeting money that they don’t have yet. It’s easy to imagine any amount of future money when you do your budget, but then you don’t see the real need for change in your habits. You’ll go through the motions of what you think is budgeting without getting the positive benefits. Bottom line? Only work with the money you have now. The rest will come.

What are your responses to these two excuses? 1) I don’t make enough money to budget. 2) I make enough money to not worry about budgeting.

No matter how much money you do or don’t have, you have priorities. You’ll be happier and experience less stress if your money is aligned with them. That’s a budget.

How does YNAB compare to Quicken? Sometimes the best way to describe something can be through contrast.

The biggest difference, for me, is that other systems are retrospective. They look backward and give you reams of data. But sometimes, as one of our YNAB teachers likes to say, it’s just a glorious record of your overspending. A YNAB budget looks forward. It says, here’s how much money I have right now. What do I want it to do for me today? Next week? Next month? YNAB’s strategy aligns your money with your future aspirations rather than looking back.

For more information, YNAB has an entire article on the subject you can read here.

YNAB vs Mint? The great thing about Mint is that it’s free and it will connect to all of your accounts and automatically track transactions. The bad thing is that they have ads and you are not as in touch with your spending as when you have to put each item into YNAB. The whole idea is to get you to consult your budget before spending, and if transactions are recorded automatically you might never do that.

We’re really excited about a development we have just around the corner that will allow YNAB to connect directly with your bank. We shied away from this a bit in the past because we do believe, as you said, in being in close touch with your money. We never wanted automation to go so far that it put you out of touch with decision making. But by helping you stay organized with your transactions, we can keep you focused more on decision making. What do these dollars need to do for me right now? That’s an active process you need to be a part of. It’s what reduces your stress and allows you to take total control of your money.

sound-design-live-money-parents-minionMany sound engineers are independent contractors with irregular income. YNAB can work well for them because it has you wait until you have income before you budget any dollars, but what about the future? How much money should I have saved (buffered) so that I can take advantage of things like automatic transfers into my retirement account and automatic bill payments?

That is a decision that depends a lot on variables specific to your business. I mean, we tend to say that you should have at least a month’s worth of expenses in reserve. But what’s your risk tolerance? How even or uneven is your cash flow? How much do the cash needs of your business tend to vary? A lot of business owners would look at this and decide they need three, four, even six months of expenses saved.

What are some successful methods you have seen people use for budgeting with shared expenses? Colleagues, partners, spouses? Expenses that you don’t have complete control over (eg: you split grocery shopping with your girlfriend, but you do all of the shopping)?

I’d love to say there are tricks that will make it easy, but it really comes down to communication. Whether it is a business partner or a life partner, you’ve got to be clear about both your individual priorities and your shared priorities, especially at the places where they overlap or diverge. Have regular conversations about it. Have a budget date.

The other important thing in a shared budget is to leave some space for some autonomy. Hey, here’s money that is just for you or just for me, and we don’t have to report back to each other about it. That really helps things work smoothly.

TECHNICAL

How important is reconciliation? I haven’t done it, ever. Every day I spend about ten minutes checking all of my accounts for new transactions to make sure there was nothing I missed or entered wrong. Then once a month I “Adjust Balance” on each account because it is usually off a few dollars.

Reconciliation is important because you want to make sure the dollars in your budget truly exist in your accounts! If you don’t have an accurate record of transactions, you may be budgeting money you don’t have anymore. Having said that, making that adjustments you describe does the same job. You know you’re up to date.

I made some scary rookie mistakes when I first started using YNAB that I want to share with everyone. If you have any corrections or comments, that would be great.

TIP #1: It took me a while to wrap my brain around YNAB and credit cards (pre-YNAB I used debit cards only). For the first five months that I used it, I was budgeting all of my credit card expenses, but then I was also budgeting money to pay the credit card bill. That means I was budgeting twice as much as necessary and really stressing about the bill. When I finally realized what was happening I went back, corrected the problem, and realized that I had about $6,000 I had saved…on accident.

TIP #2: Since no one really taught me how to use a budget, traditional thinking told me that I should estimate my spending into categories for the coming month. It turns out Mark Butler calls that budgeting with Monopoly money. The way YNAB works is that you never budget a penny until you actually have it. So when you get paid, you apply those dollars to your budget. This is more like the envelope method that you may have heard about. One way to estimate into the future, which I have been using, is to use next month’s budget. So if we are in January, then you can go ahead and play with the budget in February and look at the summary at the top to see how much you have available.

Absolutely. That’s the sort of conventional wisdom about what a budget is – a plan based on what you think might happen if all your account balances follow a perfect path that happens to match exactly the last six or twelve months. But that is far less powerful than intentionally giving a job to every dollar you have right now. Want to look into the future? Set aside money for those future ambitions right now. When you have next month’s studio rental fee already set aside, there’s no need to forecast. You know you’re doing well.

Get Ready! Slow August Is Right Around The Corner

By Nathan Lively

7-actions-you-can-take-today-solve-short-term-cash-flow-problems-dice

7-actions-you-can-take-today-solve-short-term-cash-flow-problems

This article was originally published in Pro Sound News Europe. You can read it here.


 

 

 

7-actions-you-can-take-today-solve-short-term-cash-flow-problems-john-travolta

It happens to me every year. Come August, work slows almost to a crawl. Suddenly, I’m in survival mode.

I hate it, but it’s not always a thing born of sloth. This year, for example, I’ve been so busy focusing on future projects that short-term cash flow went way down on the list of priorities. Unfortunately, money is something that can’t be ignored for long. Unless you are ready to take on a major lifestyle shift, there are bills you have to pay.

Here are seven great tips for dealing with short term cash flow problems.

#1 – Plan for next year, today.

If you look back at your calendar from the last few years, chances are good that you’ll find cycles of feast and famine. Don’t ignore the lesson! Build a healthy relationship with money by using those cycles to make a plan, then review it regularly.

7-actions-you-can-take-today-solve-short-term-cash-flow-problems-oragamiHere’s a basic example that I’ve used:

  1. $2,800/month = My baseline survival income.
  2. $255/month = How much I need to save each month for the next 11 months to prepare for slow August.
  3. $3,055/month = My new baseline survival income.
  4. Create a new August Fund account and set up automatic monthly transfers of $255 from my checking account so that the money is saved before I can spend it. Or setup a savings goal using YNAB.

#2 – Collect on outstanding invoices.

No need to explain this. Go through your past invoices and confirm that they are all accounted for. While you’re at it, check for any unbilled work.

The last time I did this, I found $560 in outstanding invoices (whoops!). One required me to go around the client directly to their bookkeeper, with whom I have communicated in the past. Another required some tough love.

I’ve only ever had to chase one client around the block, and that was because they sincerely thought they had already paid me and that I was crazy. The venue I was working with put a hold on her account and she eventually paid up. Turns out she had PayPalled the wrong person. Ah, technology.

#3 – Phone a friend.

Only in this case make sure the friend is a colleague or client. This isn’t begging, it’s a great opportunity to reconnect with existing clients and colleagues who you like working with. Give them your availability over the next month in case they have any last minute gigs they can refer you for.

7-actions-you-can-take-today-solve-short-term-cash-flow-problems-south-parkHOWEVER: Do not slide backwards into working with dud clients. When times get tough and you’re nervous about paying the rent, you might be tempted to reconnect with past clients you hated working with or who were in no way ideal. It’s not worth it. Instead of falling back out of fear, use your time to make new connections and ask for referrals from current clients. Doing work you hate will only demotivate you and lead to more of the same crap.

#4 – Sell some equipment.

This is low on the list because selling used gear might not be worth the time you put into it, but if you’ve been meaning to get rid of some stuff anyway, now is a great time to get on that.

For example, I have an amazing Seventh Circle mic preamp that I built with my own two hands, but I hardly ever use it anymore. I would be much happier for it to find a better home.

#5 – Brainstorm and take action.

There’s nothing like a specific goal to make you focus. Follow these steps:

  1. Write your intended outcome at the top of a piece of paper or Workflowy list. For example: Earn at least $2,800 by Aug 31.
  2. Quickly brainstorm as many possible projects or actions as you can. To get your creative muscle moving, set a big goal like fifty ideas. Having trouble? Ask a friend. They are often more objective and will suggest solutions you were afraid to consider.
  3. Review your list and choose the 20% (20% of 50 is 10) of your actions that are most likely to be successful. How do you choose? Use your best judgement from past experience and all of your current knowledge of the market.
  4. For each of those top projects, list all of the actions needed to complete it. Defining at least the first action will force clarity.
  5. Prioritize your list based on the projects that are most likely to deliver the fastest returns. Get to work. Avoid skipping the difficult and uncomfortable tasks; instead, use the motivation from your intended outcome to be bold.

#6 – Tap into your emergency account.

They call it  savings for a reason. Avoid tapping your emergency fund until all other options have been exhausted.

What’s that, you don’t have an emergency account? You don’t even know what one is? Don’t worry, I didn’t either until a year ago. Basically, an emergency account is a savings account where you have accrued funds to support yourself without income for 2-12 months. This is different from the “August Fund” account I mentioned in item 1 — you should contribute to your emergency fund every month in addition to your lean-month accounts.  Start saving today with whatever you can afford (really, even $5 a month is better than $0 a month!), but set a goal to start making enough so that you can fill that emergency account within the next 2 years.

#7 – Communicate with your debtors.

Landlords hate to be stiffed, largely because in many cases it is extremely difficult to force you to pay. If you ask them for leniency they will probably just say no. Instead, state your situation and your intended date to square up. Keeping them in the loop will avoid aggressive behavior.

Once I received an aggressive Pay up or we’ll kick you out letter from my landlord in NYC, even though I’d paid. I called him up and it turned out that his secretary had accidentally attributed my payment to someone else and their system had automatically sent me the letter. Automated legal action. Scary.

Conclusions

I hope this helps to relieve the pressure of your short-term cash flow issues. Remember, don’t panic! If you keep your head, you will often find a better solution than selling your soul. If you need help brainstorming ideas, email me.

The Minimalist Guide to Budgeting (for Sound Engineers)

By Nathan Lively

sound-design-live-minimalist-guide-budgeting-piggy-bank

how-i-stopped-going-broke-budgeting-sound-engineers-see-no-evilI used to go broke every year. To stay out of the red, I had to stop ignoring money.

Being a sound engineer or a freelancer of any kind can make budgeting difficult. Fortunately, difficult does not mean impossible! I’ve learned several powerful strategies in the last year that have completely changed my game.

The Big Shift

In March of last year I attended the Big Shift Experience seminar. It was my first real business seminar and I was struggling to keep up with all of the new ideas. They had us perform some great exercises, and one of my favorites targeted our relationships with money. I’ll describe it for you so that you can try it with a friend:

  1. sound-design-live-minimalist-guide-budgeting-hello-moneyPretend that your friend is money, in the flesh. Talk to them! What do you appreciate about Money? What has been been challenging for you? What do you want for the future? Take five minutes to get everything off of your chest.
  2. Next, let Money take five minutes to respond (using their imagination) about how they feel about you and the things you just said. They might explain the status quo and make some suggestions for the future, or they might try to help clarify the things you said to them. They don’t need to give you the secrets to success; the power is in hearing your words and intentions reflected back to you.

This may sound a little woo, but here’s what I discovered:

  • I had been mostly ignoring money my entire life. I only gave it attention when I was upset about my finances and forced to confront the situation.
  • To build a strong relationship, Money and I needed to hang out more regularly.

Action

So, what was the best way to integrate Money into my life? Slowly and steadily. I started simply, by taking ten minutes every day to review my finances.

  1. Check all accounts to record/confirm new income and expenses.
  2. Make budget adjustments as necessary. (The nice thing about checking in every day is that you see the small transactions and habits that can lead to bigger problems and catch them before they grow.)

Results

Super simple, but just that little action can make a big change in your finances. What you give attention to grows.

I was ignoring money because I didn’t want it to run my life. The result was that it ran my life. I’m not a millionaire (yet) but I know where my money is going and I no longer budget on faith, because I know:

  • How much my lifestyle costs.
  • How much money I need to make to maintain my lifestyle.
  • How much I need to charge for my services.
  • How much I can save for my future.
  • When I will be able to stop working for money (more on this in a future post!).
  • How much I can spend on food, travel, and lap dances.

Why You Need a Budget

Here are some common excuses people use to avoid writing a budget:

  • I don’t make enough money to use a budget.
  • Budgets don’t work.
  • I check my account balance before every purchase.

sound-design-live-minimalist-guide-budgeting-piggy-bankHow well have those worked for you? Have you gone broke?

I have. Many times.

If you are going to participate in modern society, you are going to spend money (or Bitcoin). Stop pretending like you can run it all from your head and write those numbers down.

NOTE: It’s not all about limiting spending. It’s about exercising control, and creating goals and a strategy for success.

The Solution

Create a budget. Update it daily with current information.

I recommend You Need A Budget (YNAB) software, but you can read their four-step method for free right now. Here’s a quick overview:

  1. Give every dollar a job: This is similar to the envelope technique, if you’ve ever tried that. One big mistake that I made over and over while trying to make a budget is that I would use “Monopoly money” (that is, fake money that I didn’t have yet). I would project into the future and try to guess the entire month, then be surprised when I came up short. A more realistic approach is to only budget money when you have it, and then use that real money only for the next most urgent items in your budget.
  2. Save for a rainy day: Last month I had to spend $500 to repair my car. Surprise! It sucked, but honestly, I can expect that happen at least once a year. As soon as I realized that, I created a Car Maintenance budget category where I save $42/month ($500/12months). Next time my car breaks down, I’ll be ready.
  3. Roll with the punches: Surprise expenses are a big problem that I struggle with when I’m budgeting. There are a few ways you can make them easier on yourself. Last month I needed a piece of software I had not budgeted for. It was fairly simple to move some money out of my Buffer and Marketing category and into the Software category. What’s a buffer?
  4. Live on last month’s income: A buffer is a safety net equal to at least one month’s income. Once you have a buffer saved, you can budget out an entire month in advance and be more flexible with surprise expenses.

If you don’t want to buy YNAB ($54, normally $60), you can still get started today with a simple spreadsheet.

* * *

Was it hard to change?

A friend wrote me with this question:

How hard was it for you to start using the software? Not in terms of learning the interface, but in terms of actually managing your money? I go through periods of ignoring it (like you described) because it gives me anxiety. Did this help change that mindset for you?

Yes, it was hard. Yes, using the software was helpful.

Since I had never really learned how to use a budget before, it was pretty tough to get started managing my money. One important point is that I work on it for about 10 minutes every morning. Some people work on it once a week, but I like to just do a little every day. That way I can see trends develop and fix problems before they get out of control.

It was also emotionally challenging. I had been lying to myself for a long time about how much money I spend and how much money I need to earn to pay the bills. I used to think it was $1,900/month. Turns out, it’s $2,800 minimum, usually a little more.

Years ago, after reading my first business book, I opened a bunch of different accounts because I thought that’s what you do in business. This ended up being really challenging because I wasn’t making much money and it was all spread out. It was a constant juggling act.

The YNAB approach works much better for me because almost all of my money is in my checking account, where the action is. I only move it out to go into my investment account at Vanguard. I’m a lot more flexible now. If a big expense comes up I can quickly move numbers around without making a bunch of bank transfers. Also, all of my numbers are backed up by real money now, which is a huge change for me. I’m not estimating my spending any more. I only budget money when I have it.

There is a big learning curve, but I am biased because I started from very little experience.

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