Extreme Cash Budgeting with Wesabe

I've long been a personal finance geek, starting as an early user of Quicken and CheckFree in the early 90s, and culminating in my role as CTO at Corillian where I helped build online banking products for many of the world's largest financial institutions. I left Quicken in favor of Microsoft Money about 5 years ago primarily because Money's budgeting tools made more sense to me and fit with my workflow. Julie and I like to use a zero-base approach that allows us to re-allocate categories mid-month but ruthlessly avoid going over the aggregate outflow budget. For example, we might budget $200 in a month for dining out but decide half-way through that we'd rather use $20 of that bucket to buy a couple of CDs that weren't in the entertainment budget. Money made it easy to allocate between budget categories, a feature that Quicken did not make easy.

Two years ago when I switched to an all-Mac world, I kept Windows (via Parallels) around so that I could run two programs: Microsoft Money and TroopMaster, a specialized application I use for tracking advancement and other records for our Boy Scout troop. It was a hassle to jump into Windows just for budgeting or financial review and the information wasn't easily accessible when not at my home computer. I was ready for a change and my first step was to explore options for the Mac. Quicken for the Mac is largely an afterthought (though QuickBooks Mac is quite nice), and the other niche products had nowhere near the robust capabilities for online integration (pulling my bank data via OFX, for example) or budgeting. Time to look for an online solution.

There are 4 big players out there that provide online financial management with robust account aggregation and budgeting: Yodlee, Mint, Mvelopes, and Wesabe. All are free with the exception of Mvelopes. I've spent a decent amount of time in each of the products and think highly of all of them but Yodlee. Yodlee (disclosure - I have some history with them as they were a competitor of Corillian's and remain a competitor of the companies that bought us, CheckFree and Fiserv) has extremely robust account aggregation but I still do not like their user experience. Mvelopes is nice but the fees are a bit steep for the value offered, especially in comparison with the two great free offerings from Mint and Wesabe.

Before I talk about Mint vs Wesabe, let's turn back the calendar a bit to January 2009. My income was severely cut back as I worked to bring the startup I work at to a solid financial footing as we seek a stronger customer base and funding. Julie and I have always been diligent with our finances but like many couples that see household income grow steadily we had become a bit too tolerant of casual luxury spending. It was time to get serious about cashflow and see how much we could cut back and sacrifice.

We have been Dave Ramsey disciples for many years. We live a largely debt-free life with our only financial liability being our beach vacation house that we own jointly with family. We don't use credit cards, own our personal residence free and clear, and will likely never borrow money again. When Julie and I sat down in January we did a six-month cashflow forecast to ensure that we could live off a very meager income without having to go beyond our emergency fund into investment savings. Some drastic changes were in order given the spending levels we wanted to get to, so we decided to go with an all-cash system for all of our discretionary spending. This was in addition to cutting many recurring spending categories, including delaying or drastically reducing some strategic long-term goals such as retirement and college savings.

Our cash system is the tried-and-true envelope system. Our envelopes are: Groceries, Dining Out, Entertainment, Pet Food, Hair Care, Allowances, School Lunch, Incidentals, Cash for Next Month, and Board Games. We set very aggressive spending levels for each and withdrew cash at the start of the month to fund the envelopes. Julie has always been a frugal grocery shopper, relying primarily on Winco and Costco for food and using common sense to save money on our big staples like milk, cereal, and meats. She took things to another level starting this year, spending a significant amount of time every week scouring for sales, coupons, and ways to multiply the value of both. Surprisingly, the typically higher-priced stores (Safeway, Albertsons, Fred Meyer) became regular destinations for Julie. Julie learned the rhythm of each store and built a targeted strategy for planning her trips and purchasing. She's been able to get our monthly grocery spending to the $500-$600 range with no sacrifice in meal quality. If anything, our eating has been enhanced as she introduces healthier fare with more raw and scratch ingredients. With two (rather large) teenage boys we consume a lot of milk, cereal, fruit, etc.

My board game budget went to zero, meaning we don't directly fund it each month. I only spend what I earn through sales of existing games or other income sources tied to the hobby. We cut the school lunch spending in half and instead give the cash directly to the boys and let them choose if they want to spend it on school lunch or make their own lunch every day. I pretty much stopped eating out for lunch and started brown-bagging it. Dining out became a special occasion for all of us, a surprisingly nice side effect of this behavior change.

Turning back to the Mint vs Wesabe discussion, it was very important that whatever tool I chose easily supported this change in financial tracking and planning. I want my finances mostly on auto-pilot for recurring transactions that flow through my bank accounts, but I need a lot of control over cash tracking. Wesabe wins this battle hands-down as they allow me to manage my supply of cash just like it were a real bank account. This is critical as there are times when we do end up using our debit card for discretionary purposes (ordering online, forgot to put cash in wallet, etc.). Let me give an example of how we make this work - let's walk through something that happened this month. Wilco's new album was just released and I gots to have me my new Wilco, so I ordered the pre-release CD online at Amazon for about $10. This comes out of our monthly entertainment budget, which we funded with an ATM withdrawal at the start of the month.

1) I withdraw $380 to fund several cash accounts: Dining Out, Entertainment, etc.. There's also a $3 service charge which I track, though USAA refunds those back to me at the end of every month.

2) I purchase the Wilco album online for $9.99. This gets allocated against the Entertainment category, so right away I'm $9 over budget because we pre-funded the full $140 for the month with cash.

3) I move $9 from the Entertainment envelope to my "Cash for Next Month" envelope. Note: it helps to keep plenty of $1 bills around to make it easy to do this, especially when paying allowances to the boys.

4) I record a cash transaction in my Wesabe cash account with a $9 credit. This offsets the $9 purchase I made in Amazon and balances the books. Note that the cash balance in my Wesabe account always matches the amount of money you'll find in my "cash for next month" envelope.

I go through a similar process at the end of the month as I clean out the envelopes to feed forward into the next month. I enter credit transactions into the cash account on the last day of the month and move the money to the "cash for next month" envelope. This gives a reasonably accurate view of the actual spending levels for each category each month and helps us understand where we might be able to trim. At times we might steal between categories (e.g., use some Dining Out money to pay for Groceries) but we don't track every penny that flows between the envelopes.

Mint does not support this sort of fine-grain cash tracking transaction - it only allows you to subdivide banking transactions against a cash account. Where Mint really shines is in the wide range of accounts it can aggregate (I think this is largely courtesy of Yodlee) and therefore it gives a much more robust net worth picture. But Wesabe truly gets it done for our process and I'll stick with them as long as it helps my workflow so completely.

Will Julie and I leave the cash model once our income returns to "normal"? Almost certainly not - by seeing how low we can go, we feel freed to be very deliberate about establishing long-range strategic goals for our extra income (trips, luxuries, eventually board games again). Imagine the prospect of having $5,000-$10,000 of free cashflow to work with every month on important goals - we expect to be there again soon.