YNAB Rule 2: Embrace your true expenses

YNAB Rule 2: Embrace your true expenses


Auditioning in a quartet

[00:00:00] Steve: So Tyler, I recently auditioned with a quartet to sing, potentially,the national anthem at the local baseball stadium here, which was kind of a fun experience.

[00:00:12] Tyler: Whoa. I did not know you were in a quartet.

[00:00:15] Steve: Uh, well in a quarter, I mean, it was, it was a bespoke,

[00:00:18] Tyler: Oh, someone put it together just for this.

[00:00:20] Steve: just in time

quartet, which we just put it for, just

[00:00:23] Tyler: A just in time quartet. How, where'd you meet these people? Are they from the choir that you're a part of or

[00:00:29] Steve: uh, Yes, actually. Yeah. Neighbors, but they were also, they have also all been in, uh, the Millennium Choirs and Orchestras that I was in.

[00:00:38] Tyler: Well, that's pretty cool. So what was the audition like? Do you just, like, who are you auditioning for? The baseball stadium people

[00:00:44] Steve: Uh, yes, actually, it was like the two folks from the staff of the baseball team and then one music teacher who I presume actually knows, you know, who, who is doing a good job at singing

[00:00:59] Tyler: so they [00:01:00] have a music subject matter expert, not just baseball. That's good.

[00:01:04] Steve: And I presume that the folks from the baseball staff are also interested in the music side of it, or they wouldn't have signed up for this, I guess?

I don't know, but yeah, it was, it was a fun experience. They brought, they, they divided you up into groups of about 10 auditioners, and we would all go into the room together, and so you're kind of singing for an audience. Each time and so everybody in the whole group went and then that group would go they bring in a new group Sort of thing so I got to hear a few of the other auditions And one of them was a really cool like bass guitar electric guitar Solo rendition of it, which was fun And then all the rest of them were solos and some were some were okay.

Some were pretty good There was like a little girl That had just a, you know, a fun voice. It's fun to hear little kids sing, especially when they're really good.[00:02:00]

[00:02:00] Tyler: Yeah. That's amazing. So I, I did not even know this was a thing. I never even stopped to wonder how they pick the people for singing the national anthem of baseball games. But that's, that's interesting. So what, so is this like a barbershop arrangement or more like, yeah. Like what, what's, what was it like?

[00:02:18] Steve: it was not a barbershop arrangement. I, I proposed one, but we, we nixed it in favor of a more traditional one that we already kind of knew. So it was easier to throw together because this was like two days, two days before the audition. We're like, Hey, we

should go audition.

[00:02:31] Tyler: this is just spur of the

[00:02:32] Steve: Spur of the moment, but yeah, we're all good enough that we can kind of just throw it together and, and we sound good.

[00:02:38] Tyler: That's

[00:02:39] Steve: Uh, yeah, but just the four part harmony, four men.

[00:02:42] Tyler: Well, keep me posted. I, I hope you get it and I hope this gets recorded and I hope I get to see it. See it.

[00:02:49] Steve: Yeah, by the time this episode goes out, we will know whether we got, uh, got on the schedule or not, but at the, at this time, I do not [00:03:00] know. we'll see.

[00:03:01] Tyler: Oh, wait in suspense to find out. Cool.

[00:03:11] Steve: Hello there, dear listener. I am Steve.

[00:03:14] Tyler: And I'm Tyler and welcome to another episode of It's Not About The Money, the podcast where we help you gain the clarity you need to run a successful small business.

[00:03:24] Steve: Tyler has a financial coaching practice. I run a tax business and we are both small business owners like you. This podcast is our exploration of entrepreneurship, one episode at a time.

Rule 2: Embrace your true expenses

[00:03:36] Tyler: And today,

[00:03:37] Steve: today we're continuing our YNAB rules series. This is rule two. If you missed rule one, you can go back to the previous episode and catch that one. This is rule two. What is rule two, Tyler?

[00:03:52] Tyler: Right. So the second rule of YNAB, you need to budget is called embrace your true expenses.

[00:03:59] Steve: What [00:04:00] are true expenses? True. The real expenses that actually hit the bank account, not the, not the pretend

[00:04:05] Tyler: Right. Right. Well, I think this rule has its root in the idea that if you were to ask the average person, what are their monthly expenses, they would start with things like the mortgage, utilities, the phone bill, subscriptions, whatever, like they would list out all their monthly expenses. If you just ask them to tell you what the regular bills were, but they might leave out things that occur less frequently than every month, or that are unexpected, or unpredictable.

The idea behind embracing your true expenses is you take all of your bills that occur throughout the year and you treat them as if they were monthly bills.

[00:04:42] Steve: Okay, so this is the car insurance only comes up every six months, but I pretend like I'm setting aside one sixth of that every month so that when it comes up, it's just all the money's there, ready to go.

[00:04:56] Tyler: Right, right. Because, uh, one of the major frustrations that people [00:05:00] have in personal finance, especially when they're trying to run a budget, is that no two months are alike. Right? There's no such thing as a normal month. Like if you were to chart your expenses month by month throughout the year, there'd be peaks and valleys.

There'd be A huge jump in expenses if your car broke down, or if you did a bunch of shopping for holidays, like Christmas or something like that. And then there would be other months where your utility bills are lower and you didn't have any emergencies somehow, you know?

[00:05:29] Steve: My December is always like this because, you know, Christmas shopping and then also the property tax bill gets paid in December because I don't have it come out of my mortgage payment every month. We just pay it directly. And so.

It's a, you know, that's a close to 10, 000 just all in one go in December.

[00:05:52] Tyler: and if you're not prepared for that, it could be quite a shock to the system

[00:05:55] Steve: Mm hmm.

[00:05:57] Tyler: part of YNAB's methodology is designed [00:06:00] to basically help reduce the number of surprises, surprise expenses.

So, what's interesting about it though is that Rule 2, Embrace Your True Expenses, is really just Rule 1 with a longer time horizon. So in Rule 1, we talked about how it's important to give every dollar a job. Right? And that rule one encourages, encourages you to focus on your immediate needs. Like here's all the money that I have right now.

I want to sign every dollar that I have a job so that I know exactly, uh, so I can cover my expenses, my priorities right now. Right? And rule two is that same thing, but you're focusing on the future a little bit. So what expenses do I have coming up that are not due immediately, or even within the realm of this paycheck or this month, um, and kind of [00:07:00] preparing for those.

[00:07:02] Steve: Ah, that's interesting. I

[00:07:03] Tyler: rule, same concept. You're just giving dollars a job that, that it's, uh, further off in the future as opposed to immediate.

[00:07:09] Steve: Okay. I wonder if that's, um, why they're in this particular order. Like you start with rule one and when you've got that one down, you move to rule two. Is it? Do they teach it that way, of like, these are sequential steps, or are they more like, learn them all at once and then apply them

[00:07:26] Tyler: You know, that's a really good question. I, they do, they, I, they teach them all at once, I think, but they do build upon each other, right? So I think they're designed so that if you did them in order, you would. That would be like the ideal way to start getting ahead in your finances. Because first things first, you've got to cover your immediate obligations, right?

Then once you've got that under control, you can start focusing on covering your future obligations. And then as we get into rule three in the next episode, we'll talk about, you know, how following rule two enables you to do rule three, which [00:08:00] is roll with the punches. It gives you the money and the flexibility to be able to do that.

And of course, all of those roll forward into rule four, which is. So yeah, I think they are in this order for a very specific reason. So that's cool that you caught

[00:08:13] Steve: That's cool. Yeah. Nice.

Categories of true expenses: Predictable and unpredictable-but-inevitable

[00:08:17] Tyler: And then as far as like, I get this question all the time. It's like, well, what are some examples of, of true expenses? And there's really only two categories I would say, and it's the predictable. That's the first category. Those are things that, you know, are going to happen, you know, when they're going to happen and you know how much they're going to be.

[00:08:36] Steve: Mm

[00:08:37] Tyler: And then the second category is true expenses that are unpredictable, but inevitable. So, so you may not know when they're going to happen or how much they'll cost, but you know, they will happen eventually sometime. So an example of the first type, the predictable, or you've already mentioned some. So like annual or semi annual [00:09:00] subscriptions or insurance premiums, right?

A big one that a lot of people forget about is registering their vehicles. And I guess that varies state by state, but in some states it's, it's a lot. Um, I actually had a client in Montana. I didn't realize that registration, according to him at least, was a lot more expensive there than I had heard of in any other state so far.

So that was interesting. That could really catch you by surprise. And of course, holidays and birthdays, those kinds of things, you know, when they are , you know, roughly how much. You want to spend on them and you can plan for it. And unpredictable, but inevitable things would be things like basically car repairs, home repairs, and vet bills, anything of the sort, right?

It's like, it's going to happen at some point. You don't know how much it's going to cost you, but yeah.

[00:09:45] Steve: I've been thinking about car repairs recently, because our van, which is, uh, I don't know, 13 years old now, is starting to need repairs more frequently than it used to.

Like, strange things are breaking down, [00:10:00] so,

[00:10:00] Tyler: Yeah. And like, it's inevitable, right? Like the

[00:10:02] Steve: yeah, if, if I had thought, you know, when we bought the car, if, well, I didn't, I didn't know how long it would last, but it has lasted quite a long time, and so it's going to continue to need more inputs, money inputs, as the, as the years go by, so, but I don't know when they will happen, so being able to plan, you know, it, I don't know how to project that, that exactly, but,


[00:10:27] Tyler: I mean, it's kind of like in this, this category of unpredictable, but inevitable, it's kind of similar to saving for a rainy day, except for it's doing that with a specific purpose in mind. Right. So instead of like a general purpose, rainy day fund or an emergency fund, um, you're calling this one car repairs or home repairs or vet bills or whatever the case may be.

How to have fewer emergencies

[00:10:49] Tyler: Right. And, and this is actually, um. This gets into a really interesting conversation is, you know, the more you follow the YNAB [00:11:00] methodology and the longer you practice it, the fewer emergencies you're actually going to have. Well, that's not the right, you know, emergencies will still happen, but they will not be a financial

[00:11:12] Steve: Right. They don't feel like an emergency.

[00:11:14] Tyler: Right. It's like, Oh, I need new tires all of a sudden, a thousand dollars. Like if you don't have a thousand dollars set aside for car repairs. That's going to be potentially a financial emergency or at least disrupt some other goal that you're working on. Right. Or in a worst case scenario, like, you know, prevent you from purchasing something else that you need or want, or make you more likely to rely on debt or credit cards.

But if you've been saving a hundred dollars a month into your budget category, that's called car repairs someday. Um, And you need new tires, you just have the money. It's amazing. It's really amazing. And rule two is where you really start to feel like you're getting ahead in your finances as opposed to just keeping up.

[00:11:58] Steve: Mm hmm. [00:12:00] And that gives you the flexibility you mentioned earlier of, uh, like, I don't know how much the next repair on the van will be, but because there's some set aside in that category and there's also some set aside in other categories, like when we get to rule three, we can roll with the punches.

Like maybe it ends up being more than we set aside for that specifically, but we've got some many other places we can move it around. Make it work.

[00:12:24] Tyler: Right. And I know we're going to do a whole, a whole episode on it, but rule three, roll with the punches is essentially about being flexible. But you're being flexible, you're able to be flexible because you have money in your Rule 2 categories.

[00:12:39] Steve: Mm hmm. And you don't have to

[00:12:41] Tyler: to move around.

[00:12:42] Steve: about predicting the right amounts. I guess is what I'm getting at here. Like, just start setting things aside. Take your best guess and go with that. And then you'll iterate as you learn more.

[00:12:54] Tyler: that's right. I mean, I've talked to some people who kind of get a little Um, [00:13:00] what do they call it? Paralysis analysis? No, no analysis, whatever. Like decision there, they, they get caught, they get stuck here. Right. Because they don't know, well, I don't know how much it's going to cost to fix my car. So how could I pick a target to save each month?

And really the idea here is that it's better to have some money than no money. And you're right. You're going to be wrong and that's okay. Yeah,

[00:13:27] Steve: a hundred thousand. So there's your parameters, like narrow that down a little more. Like you, you could, you could start to get some concrete numbers by throwing out these wild extremes in this. Well, okay. It's, it'd probably be closer to this amount. Okay.

There's your number. Go with that.

[00:13:42] Tyler: Yep. Yeah. So one of the common difficulties with rule 2, it kind of relates to that uncertainty about how much, but also what, what are my true expenses? And the thing is, true expenses in general, they're easy to forget. If you're not used to keeping track of your finances, you probably [00:14:00] only ever think about these when they happen.

[00:14:02] Steve: Mm hmm.

[00:14:03] Tyler: And you're like, Oh no, I need money. Where is it? I don't know. I've got to go find it somewhere. Um, and so let's say you set up, you know, you're starting a new budget. You set up all the categories you think you're going to need. And three months down the road, an expense pops up that you didn't plan for.

The good news is you can just add it. I mean, this is a pretty quick fix. Add it to your plan, set a target for it. And it will take a while to get these dialed in, but after like a full year of doing this, you will have discovered many, if not most, of the potential true expenses that are going to apply to your life.

Keeping in mind, of course, that life changes all the time, and so you'll need new ones and you'll need to retire old ones as your life changes, but yeah. Um, the thing is, once you identify a new true expense, you add it to your budget, you put a target in there, like, you'll never forget about it again. For me, it was the car [00:15:00] registration where this was life changing, right?

It's like, a couple hundred bucks every year, it always caught me by surprise, I'd get the notice in the mail, it's like, oh man, I gotta get my safety and emissions inspection, and, you know, register with the state, da da But now, I've got a budget category for that, and for years and years, It's just like a non issue.

I don't even think about it. I just know that when it's time to do that, and I think for me, it's usually like in the springtime, I've got the amount of money. It's just sitting there. It's ready to go. It doesn't even feel like, I don't feel the pain, I guess, of spending that money because it's something that I need to keep my car running and I'm prepared for it.

It's great.

[00:15:35] Steve: Love that feeling of a bill comes due and the money's just already there waiting for it.

The joys of auto-pay

[00:15:41] Tyler: Yeah, yeah, and, and this is another cool like impact of this is, um, a lot of people don't take advantage of autopay features, whether it's for like their credit card bills, their utility bills, their insurance premiums, whatever the case may be, right? Because they're nervous that when that [00:16:00] day comes and.

The company that's sending the bill goes into their checking account to withdraw it, like it won't be enough money and they'll overdraft or something. Right. But if you're following YNAB rule two, that will never happen because you will have planned for it. It'll be there and you can set up autopay on all your bills and just kind of sit back and let your finances run themselves a little bit.

It's very nice.

[00:16:21] Steve: Yeah. That's also really fun. I don't know if we've talked about this on here, but you, I, I used to go pay off the credit cards like every, every week, every two weeks or something. It was just like a task in my to do list on Friday afternoon or something. Uh, and you encouraged me to put them all on autopay just to, so that I wouldn't have to think about it and just see what happened.

Because I was nervous about that because at times in the past there have, I have been on the credit card float and there wasn't enough in the, in the bank to cover the full balance at any given time. And so I didn't want to like get caught off guard. [00:17:00] Uh, but I did it and it has been very nice. Like I, I haven't turned it off since then.

It's just been

on and then I don't, I have to think about it anymore. So yeah.

[00:17:11] Tyler: Um, well, I'm glad I converted you, and I'm also glad that it worked out. I'm glad that it's, that it's improved your life, it sounds like.

[00:17:19] Steve: Mm-Hmm.

[00:17:20] Tyler: You know, we have to do a whole episode about managing credit cards, because, uh, that's not like Directly related to the rules per se. It's more of a mechanical thing or, you know, I don't know.

There's a lot to talk about there. And people do have like that concern that you have. I, I've worked with clients who pay off their credit card in full every day.

[00:17:41] Steve: Oh, wow. Every day.

[00:17:43] Tyler: Yeah.

[00:17:44] Steve: That, that seems unnecessary.

[00:17:46] Tyler: Well. I agree, but as we learned in the psychology of money episode, you know, there's a reason people do that, right? That it doesn't seem silly or unnecessary to them, but it's interesting to dig into it and be like, okay, [00:18:00] what, what is driving that behavior, right?

[00:18:03] Steve: Mm hmm.

[00:18:04] Tyler: And sometimes it's, uh, just a misunderstanding of how credit cards work in general.

And they think that carrying a balance means having a balance, which is not the case.

[00:18:14] Steve: Ah,

[00:18:15] Tyler: Um, you know, they don't want to pay interest on it. Sometimes it's a concern with like credit score and credit utilization. They're trying to like maybe artificially pump up their credit score for some reason, or, yeah, usually it's a misunderstanding of some thing like that.

[00:18:29] Steve: Because I do remember, uh, earlier in life when my credit limit would be lower, I would make sure and pay it off frequently enough that the balance never got above the, whatever percentage they recommend.

[00:18:41] Tyler: yeah, yep. But even that you wouldn't have to pay it off every day,

[00:18:47] Steve: No,

[00:18:48] Tyler: So,

[00:18:49] Steve: but, but yeah, but I, I'm starting to see where they would come from wanting to do it that frequently. Okay.

[00:18:56] Tyler: and I have a couple of clients even right now that still pay off their [00:19:00] credit card, uh, more often than it's due. And there's, again, I don't, there's nothing wrong with that at all. I mean, you know, not, not, not at all, but it is more work than is necessary for the same financial outcome.

Now there's gotta be a psychological outcome, maybe that's different. Based on what they are comfortable with and what, you know, what their experiences are. But, but, uh, yeah. And so I don't wanna push anyone in any direction, but if I ever see someone doing like too much work or like more work than is necessary just to make, you know, for the same result essentially.

Right. Uh, I like to kind of like talk through it with them and be like, okay, imagine if you only had to do this once a month or never because it's on auto pay. But anyway, little side sidebar there on credit cards.

True expenses vs. an emergency fund

[00:19:47] Steve: So what's the difference between true expenses and like a big lump sum emergency fund?

[00:19:56] Tyler: Ugh.

[00:19:56] Steve: Why, why would you want one over the other?

[00:19:59] Tyler: I don't [00:20:00] know. I go, sorry. I side there because like, I find this is such a fascinating topic for me. And I, I'm always changing my mind on it.

[00:20:09] Steve: Oh, okay. Tell me

[00:20:10] Tyler: Oh, well, okay. You know, earlier we kind of got at this a little bit where it's like, you know, is your car breaking down and having a 2, 000 repair? Is that an emergency?

And the answer depends on whether you have money set aside. to cover that expense already or not, I think,

[00:20:31] Steve: Yeah.

[00:20:31] Tyler: I think, right? So, so, um, really the difference between having a lump sum emergency fund and funding your true expenses, I think is maybe Personal preference or semantics. I'm not, I'm not sure. I mean, technically the difference is they are named, they are named budget categories, right?

So like I've given these dollars the job to repair my car when my car breaks down, which it will, [00:21:00] whether it's next month or in five years,

[00:21:03] Steve: Okay. Versus, I have given these dollars a job to sit around and wait for some emergency, which I expect will happen, but I don't know what it is, or how much it will be, or how many will come all at once, and so go sit in this big pile together.

[00:21:18] Tyler: Yeah. And like we said earlier, the more you follow YNAB rule two, the fewer and fewer life events will qualify as an emergency.

[00:21:30] Steve: Mm

[00:21:31] Tyler: So I'm kind of at the point in my life, so again, this is all personal preference, so I'm not recommending necessarily that anybody do what I do here, but just like to help you kind of, to walk through like my thinking on this.

is, I got to the point where I had a separate budget category for my car repairs and car breaking down. So, that's not going to be something that comes out of an emergency fund. Um, and then, since I became a homeowner a few years ago, I started a specific budget category for appliance repair and [00:22:00] replacement.

Because I know that's a big one, right? If your refrigerator dies, or your washing machine breaks, or like, whatever the case may be. I've had problems with my furnace, actually, even though my home was just a few years old. And so you know, furnaces, HVAC systems, as we've talked about on this show before, are really, really expensive, like shockingly so it turns out to me at least, right, as I've never purchased one before.

Um, and so that would be a big emergency if it's the middle of your winter, uh, in a cold place and your furnace is like. Not repairable? You need a new one and you're going to be taken out alone if you don't have a big chunk of money sitting around for that,

[00:22:39] Steve: Mm hmm.

[00:22:40] Tyler: So yeah, I guess what I'm trying to say is I've, I've kind of systematically tried to expand my true expense, uh, categories so that there are fewer categories that I would need, or fewer life events that I would need to take out of a lump sum emergency fund if they happened.

Like, I have another one that's just, uh, it's a [00:23:00] category, budget category for my health insurance deductible, like the amount of my health insurance deductible, right? So, like, if I had a medical emergency, I would have enough to cover my deductible.

[00:23:10] Steve: Oh, yeah, yeah, yeah.

[00:23:12] Tyler: So now that's not an emergency. Um, so the only emergency lump sum fund that I have left is not even that.

It's a named category and it's an income replacement. So it's in the event that I lose my primary source of income. That's what that money is for is to cover my expenses until I find a new job, basically.

[00:23:32] Steve: Mm hmm.

[00:23:33] Tyler: So at this point in my journey, and as we all know, I change, you know, I changed my budget a lot. So stay tuned, but as of right now, um, I don't have an emergency fund per se,

uh, a general emergency fund.

I have an income replacement, income loss fund, and then named, named categories for kind of the big areas of life that could, that could throw me off if they happened, when they happen.

[00:23:59] Steve: I [00:24:00] like that. I, will just add another benefit I've found of having named Mm categories for these kinds of things is it's much easier for me to not pull something out of there and say, Oh, I, uh, I'm just going to use a little bit of this over here for this other thing. And then forget to replace it because it's got a name and it has a target on it.

And so I know I pulled some money out of there and I got to put it back eventually because I'm going to need it for that thing. So maybe I need it for something else right now. And that's fine. I can roll with the punches, but it's got to go back eventually. So having those named, uh, named, uh, categories with targets has been really helpful on that front.


[00:24:47] Tyler: emergency fund theft that I am, that I know personally. Yeah, I, I, because it's just like a big chunk of money sitting there and you're like, Ooh, yes, I do want that new camera lens. Or like, wouldn't it be [00:25:00] nice to have this little fun thing? And it's just so easy.

Yeah. So, you know, and not necessarily wrong again, that's not the point, uh, but I, I resonate with what you said. I, it was way too easy for me to do that to the point where my emergency fund was more often low or underfunded than it was fully funded, if that makes sense.

[00:25:24] Steve: It's like, Hey, there's a, there's a big pot of money sitting here and I've got some

fun, useful things I'd like to do with it. Yeah.

[00:25:32] Tyler: And that gets to our, back to our conversation. We had a whole episode about optionality, right? So regardless of whether you call it an emergency fund or an appliance replacement fund or an insurance deductible fund, like it doesn't matter what you call it, like having money, following rule two, embracing your true expenses, gives you choice and gives you flexibility and mitigates the impact of.

You know, [00:26:00] financial shockers to your system, or I would say, rather than that, I would say it mitigates the impact of surprise expenses in your life. I would even go so far as to say it makes your personal finances boring in a good way. Like I remember living on the financial edge and that wasn't boring. It was a little anxiety inducing

[00:26:19] Steve: Yeah.

[00:26:19] Tyler: And now it's just like, Peace of mind. It sounds so corny. That's what everyone promises in the personal finance space is, you know, eliminate money, stress, get rid of your anxiety, but like really do it, you know, follow right at YNAB rule to eliminate your money stress.

It actually is possible. And it actually is pretty, pretty awesome.

[00:26:39] Steve: There's so many other more useful things you can do with that energy rather than. Putting it towards

[00:26:45] Tyler: Like audition for singing the national anthem

[00:26:48] Steve: I I suppose. On a, yeah. Last minute.

Some of Tyler and Steve's true expenses

[00:26:53] Tyler: So Steve, uh, earlier on in this episode , we talked about some of the common [00:27:00] true expense categories like insurance premiums, annual subscriptions, car repairs, that kind of stuff. But I kind of wanted to take a look at our personal budgets and just share some, maybe off the beaten path. I don't know, some things that we've got as true expenses to maybe give some people additional ideas.

Um, I don't know that they're going to be that crazy or unique, but I've got a few on here that I am a little intense about.

[00:27:23] Steve: Okay.

So some of my high level ones, like Christmas, we've talked about that multiple times, I think. I, I theoretically have one for the, insurance deductible, like you mentioned, but it, it never gets funded fully. So that one's sort of a aspirational, an aspirational one, but.

Uh, I have a whole category of just subscriptions, and there's like a shocking number of subscriptions in there, but, uh, and those are like, uh, I put the monthly ones up at the top, and then like the annual ones are in the second half, in order that [00:28:00] they occur, and they've all got targets on them. What else?

[00:28:04] Tyler: Now I'm curious how many subscriptions you have. I maxed out once at 21, but I know there's people who have a lot more than that.

We don't have to, we don't, you don't have to answer that.

[00:28:13] Steve: are 17.

[00:28:15] Tyler: Oh, okay. So you're like, that's

[00:28:18] Steve: I don't know, maybe, maybe that's, maybe that's not an unusual number of subscriptions.

[00:28:21] Tyler: Yeah. I, we should do a survey or a poll or something. Yeah. That's, that's

[00:28:25] Steve: Yeah, so there's 17 in there. Uh, one, so one interesting idea that I got from, I don't know, Hannah, maybe one of the YNAB YouTubers was, um, if you think you might want to like get a new car or, uh, start renting a new apartment or something where your monthly payment is going to be higher than what you're currently paying. Go make a budget category for it, and put in the amount, and try it out for a couple of months. Just pretend like you had to pay that thing. Put the money [00:29:00] in that category, but don't spend it, obviously, because you haven't bought the thing. And then, come back and see. Like, was that a big deal? Was did it hurt to allocate the money there?

Or, no, that was great, let's go ahead and make the purchase. And then, surprise! You've got, like A couple of, uh, a couple of months worth for a down payment now, just for free because you got ahead of it.

[00:29:22] Tyler: Oh, that's a

[00:29:22] Steve: So I have a line in here for a new car fund. We've been talking about my van. We may need one, uh, in the next couple of years at least.

Uh, and so it's, you know, it's currently at zero, but it's in there to remind me, Hey, uh, don't forget. Do you think about this?

[00:29:39] Tyler: Someday it'll happen. That's funny because I also have a budget category for a new car and it also has a balance of zero because I can't, I've got some other stuff I'm working on right now, you know, and I, I'm hoping my car will keep lasting for a while before I get, but yeah, that's funny. That's cool.

Same here. Here's one that I have, . I have one for phone [00:30:00] replacement or new phone.

[00:30:01] Steve: Ah.

[00:30:02] Tyler: up every month for that because I know I'm going to, I'm going to buy one. I've gotten a lot better. Oh, well, we don't need to do a confessional here, but I, I used to be one of those people that I had to have the new phone every year for a long time.

It was kind of like a hobby of mine. So this category was much more used. Uh, and then I, like, did some addiction recovery, I guess, for my technology addiction. And I got up to like three years. I was doing it every three years. Um, but just this last year, I guess this is kind of a moot point now because I, I was, I, I decided to do Apple's like upgrade program instead and just get a new one every year again, because I guess I'm having a relapse.

So anyway, but it's true expense. So there it

[00:30:42] Steve: I, I probably need one of those, because my phone, the face ID only works half of the time now, which is very frustrating. I know. First world problem here. You know, I have to type in a six

[00:30:53] Tyler: yes.

[00:30:54] Steve: digit code instead, but Mm

[00:30:56] Tyler: Yeah, yeah. Along that same vein, I have one for [00:31:00] computer replacement. I do not plan on replacing my computer anytime soon. May it never die and may it stay fast forever. But, eventually, I'll need to do that. And, um, I always find the money somewhere. So I figured I would try to actually, you know, set it aside in advance this time. Is there anything else here? Let's see true expenses. Oh, here's a more mundane one. Um, I'm single. I don't have any kids, but I have a budget category here for clothing. So I don't buy clothing very often,

[00:31:28] Steve: Hmm,

[00:31:28] Tyler: I, so I just have a true, but it's like, I need it for all of your sakes, you know, uh, so. I guess podcasting wouldn't matter, but in real life, I need clothes, it turns out, and I, I hate shopping for clothes, and I very rarely do it, and I wear them until they're threadbare, I, I, I'm sorry, a lot of TMI is coming out right now, but, but, uh, so yeah, so that's a true expense for me, I always make sure I have some money being saved up for there, so that I can buy clothes, it's not my favorite thing to do, but when I do it, it's nice to just have the money.

[00:31:58] Steve: Agreed.

[00:32:00] Another one I have is travel slash vacation. I think you talked recently about, how it's kind of nicer to, rather than saving

up, like, Uh, a tiny amount every month, too, like, eventually, it would be nice to go on a vacation somewhere, maybe? I don't know. Uh, but, to say, like, specifically, I would like to go visit this person in this place, here's how much it will cost, here's a date for it.

[00:32:24] Tyler: Yep. Yeah, I, I think, yeah, I remember that conversation because I had been treating all of my optional travel as a true expense that I was just, like, saving up for ambiguously. But the progress was slow, and I, you know, I don't know, I, I've decided basically that I value travel a little bit more now at this point in my life than I have in the past, and so like, I want to do more of it, and so yeah, putting a specific trip that I have in mind into my budget, um, helps me when I'm assigning my dollars in rule one to kind of prioritize that and be able to do that faster.

[00:33:00] Um,

[00:33:01] Steve: Nice, I like that.

[00:33:02] Tyler: but, um, another thing in my budget that I treat as a true expense is daycare for my dog or, you know, boarding for my dog. Um, because I never really know when I'm going to need that or how much it'll be, but I like having money for it. It makes it easy. If I need to take some time off from work and go do something, help some family, go on a little trip, go on vacation, just nice to have.

[00:33:26] Steve: Yeah.

[00:33:27] Tyler: Otherwise, that could be kind of a burden because, you know, that can be kind of expensive. Uh, it can get expensive, I guess, depending on how long you go and how, you know, what kind of service provider you use, but I don't ever want that to be a reason for me not to do something. And so I've decided to treat that as a true expense and save up for it every month a little bit using a monthly savings builder target in YNAB.

[00:33:50] Steve: That's a great idea. Alright. Well, there's some ideas to get you thinking,

if you're wondering, what might my true expenses [00:34:00] be?

Debt payoff

[00:34:01] Tyler: Yes. Um, I thought I'd, it might be worth mentioning one other thing about, uh, YNAB rule number two and how it relates to debt payoff and maybe comparing it with like the Dave Ramsey, book that we read and did a book club episode on a while

[00:34:19] Steve: Mm hmm.

[00:34:20] Tyler: cause a lot of people ask, you know, Should I prioritize funding my true expenses or should I prioritize paying off my debts?

Like if when I've got Some extra cash flow this month, you know, where should I put that? And of course, the answer is, what's the most important thing to you? But, or as you would say, Steve, it depends.

[00:34:41] Steve: depends.

[00:34:43] Tyler: But in general, YNAB, the company, has found in their experience that they recommend funding your true expenses first, which I think is the same reason Dave Ramsey wants you to have a thousand dollar emergency fund before you dive into, you know, really [00:35:00] intensely paying off your debt.

It's because if you're putting every single extra penny Okay, so if you are actually in a position to go into debt, you're going to put all of your money into paying off debt. These emergencies are still gonna happen. Your car is still going to break down. You're still going to need to go to the hospital potentially, you know, whatever it is like.

And if you have put all of your money into your debt, then you have no cushion, and you have no ability to absorb those emergencies, and so you're actually going to potentially risk putting yourself in a position to go further into debt. And

[00:35:29] Steve: Right. So if your goal

is, is pay down debt, let's make sure you don't accidentally get more debt while you're in the process. And to do that, you need some, what, what does he call it? Murphy insurance or something? Or is that, or is that the later, when you're actually building out your big emergency fund? But anyway, yeah, you need a buffer.

[00:35:53] Tyler: Cause Murphy's Law, right?

[00:35:54] Steve: Murphy's, uh, yes. Right.

[00:35:56] Tyler: can go wrong, it will go wrong. Yes.

[00:35:58] Steve: Yeah, exactly.

[00:35:59] Tyler: [00:36:00] Yeah. So I mean, if you had to compare Dave Ramsey to the YNAB method, uh, again, it's, it's a little bit apples and oranges because the YNAB method, the four rules of YNAB are not telling you what to do with your money, actually.

And Dave Ramsey's baby steps kind of are telling you what to do with your

money. Like, here's, you know, first do this, then do this, then do this. So it's a little bit apples and oranges, but I would say in general, YNAB's approach to debt payoff is a little bit less intense than Dave Ramsey's because he, he encourages you to have just a 1, 000 emergency fund and then go crazy on your debt until it's paid off.

And YNAB says, why don't you actually just keep funding your true expenses all the way through debt payoff, which means you're going to have less money to throw with the debt. You can still be aggressive, but you should also be preparing for these other true expenses at the same time. So, eh, little compare and contrast there.

[00:36:48] Steve: Mm hmm.

How Tyler got converted to YNAB

[00:36:50] Tyler: I will say. When I was brand new to YNAB, there were a couple of things that really caught my attention and convinced me that it was. That's [00:37:00] the methodology for me. One I've mentioned many times before was their approach to credit cards, which is not really part of their methodology. We can talk about that in a different episode, but this rule two, this was a big one for me because honestly, it just had never occurred to me, which I mean, I don't know what that says about me, but you know, I was in good company.

It doesn't occur to a lot of people to prepare for these true expenses, right? It's just like, Oh, it's Christmas time. I guess I'm going to go. Rack up a bunch of bills on my credit card to pay for Christmas or, or, or whatever. So, so, uh, I think this is, you know, rule one, giving every dollar a job. That's kind of basic table stakes, zero based budgeting.

It's a great principle. It provides clarity instantaneously, which can relieve a lot of stress. And, um, that comes from ambiguity in your personal finances, but rule two. Embracing your true expenses. This is where you start to make progress, like actually starting building up some savings. And that, that was an eye [00:38:00] opener for me.

And I think it's exciting for a lot of people who experienced it for the first time as well.

[00:38:04] Steve: Yeah. And getting that momentum going is, is really exciting.

[00:38:09] Tyler: Yeah, it kind of distances you from the financial edge a little bit by a little bit.

[00:38:14] Steve: Right. And that's where the peace of mind comes from. It's when you're not worrying day to day about when bills is, when is this bill going to hit the account? When do I have to pay this thing off, and is there going to be enough? Before that happens, you just don't, you can get farther and farther away from that.

[00:38:35] Tyler: Well, I kind of want to ask you, Steve. So I know you, you're a big fan of YNAB. You've used it for years, right? Um, Have you had moments like this where, like, I mean, we've talked on this show about appliance repairs, we've talked about car repairs in our lives, whatever. I'm curious if you could, like, have you had moments where you're like, oh, darn, I have to pay for this thing, but look at this.

I have money for it. I mean, have you [00:39:00] experienced the benefit personally of rule two? Mm

[00:39:04] Steve: I have. And I do still have times where, Oh, we need a car repair, but there's not enough in that

[00:39:11] Tyler: hmm.

[00:39:12] Steve: for That and so we're gonna have to pull it from somewhere else. We'll talk about that on the next episode, but But things like, you know, the insurance. I don't even think about car insurance anymore.

It's just

[00:39:25] Tyler: hmm.

[00:39:26] Steve: Well, I except for that. They they tend to send me the rate increase Notification like a month before the bill hits and so then I have to go update the target And so we're a little bit behind by the time, you know, it's fine. But yeah,

like insurance Credit cards just don't have to think about them anymore

[00:39:45] Tyler: Yeah. It's funny. You mentioned the notices of like rate increases for these things, because when I get the email or the letter in the mail for those things, first of all, I'm always just like, oh, it's going to mess up my budget. But the first thing I [00:40:00] do every time is I go into YNAB, like I read the email, I get the new amount, I go into YNAB and I just update the target for that category, my budget, and then I just delete the email and I'm like.


[00:40:10] Steve: Yeah, yeah, I love that. I do that too.

[00:40:15] Tyler: brings a tear to my eye. All right. Well, cool. I think that's enough here for rule two. And we've even teed up some good topics for the next episode where we talk about rule number three.

[00:40:26] Steve: okay, we'll see you on that one then. In the meantime, you can email us hello at notaboutmoney. com and thanks for listening.

Creators and Guests

Steve Nay
Steve Nay
Strategic tax advisor for solopreneurs. Enrolled Agent; Owner of Daybreak Tax LLC
Tyler Smith
Tyler Smith
Financial coach for working professionals
YNAB Rule 2: Embrace your true expenses
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