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The 4 Rules of Managing Your Money w/ Jesse Mecham from YNAB

The 4 Rules of Managing Your Money w/ Jesse Mecham from YNAB

42 min read
The BiggerPockets Money Podcast

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You Need a Budget is the expense tracker/budgeter that requires no introduction…but we’ll give it one anyways! In 2004, Jesse Mecham launched this ground-breaking software, allowing money masters and novices alike to easily track their money and plan for a financially stress-free future. Jesse may have been the perfect person to build a product like this—he started tracking his expenses at age sixteen for fun!

As Jesse grew older, he continued to track his expenses regularly, allowing him to have a tight hold on his money and fight back the urge to go into debt. When his wife decided to take a backseat on working and have children, Jesse started to work harder at converting YNAB from a simple spreadsheet to a full-blown business. He was so conservative that three years into the business when he was making twice as much as his accountant salary, he continued to reinvest almost every cent of profit so he could have a strong financial foundation behind him.

Now, some eighteen years after launching, Jesse still holds the principles that he started YNAB with. He lives a simple lifestyle, enjoying “parlor time” with his seven children, keeping a strong emergency fund, and investing in a very, very conservative manner. Take it from someone like Jesse who has “made it”—budgeting can change your life.

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Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast Show, number 271, where we talk to Jesse Mecham from YNAB.

Jesse:
So we really just want people’s money to help them achieve what they really, really want. Not what you find on some Instagram scroll, but what truly gets you moving. That’s what money should help you do. And that hasn’t gotten old for me. So I still enjoy podcasts like this. I still enjoy coming on and talking about it, because it’s a message that I think everyone still needs to hear.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my all about the financial runway co-host, Scott Trench.

Scott:
I have a really good plane one, but I don’t think it’s going to land today.

Mindy:
Ugh. Scott and I are here to make financial independence less scary. Less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in NASA or real estate, or start your own huge budgeting business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I’m super excited to talk to Jesse Mecham today. The Jesse Mecham from YNAB if you don’t have time. If you do have time, you can call it You Need a Budget. This is Jesse’s company that he started in college because he needed a budget. I think his story is super fun and I’m so glad to share it today.

Scott:
It’s always fascinating to hear the personal financial journeys of these Uber successful entrepreneurs as well and how they think about money with that. And it’s often at odds, but the way that we handle it personally, and with many of the folks that come and listen to our show.

Mindy:
There are definitely some times where he says things in this episode, I’m like, “What?” But then he explains them and they make more sense. And you will listen because I call him out or I say, “Thank you for explaining this,” because I’m listening for you listeners. And I can hear you saying, “What is he talking about?” So I ask for clarification all for you. Jesse Mecham from YNAB, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Jesse:
I’m very glad to be here. Thanks for having me.

Mindy:
Let’s jump right into it, because we’ve got a lot of stuff to cover with you. Where does your journey with money begin?

Jesse:
Well, I was thinking about this a little bit. When I was 14, my dad gave me three books and he said, “Hey, you may want to read these.” And I don’t know why he thought 14 was the golden age or whatever for that, but I would say that’s where it began. He handed me The Richest Man in Babylon and he handed me The Millionaire Next Door and Dave Ramsey’s, I think at the time it was just called Financial Peace. And so he gave me those three books and I read them and enjoyed them. So I really did enjoy the topic. And I just kind of took them as absolute truth gospel like a 14-year-old can where you have no other concerns or worries. And you just think, “Yeah, that sounds right to me.” And there it was. So, that was, I would probably say my first kind of foray into what some would call personal finance and I think it’s been an influence for me ever since.

Mindy:
Richest Man in Babylon is a big book for a 14-year-old.

Jesse:
Yeah. Oh, I mean, it’s a fable, it’s an easy read, but the lessons there, they still apply. There’s nothing wrong with that book today if I need to stretch it off.

Mindy:
Oh, it’s my favorite book.

Jesse:
Yeah.

Mindy:
Yeah.

Jesse:
It’s excellent. But yeah, the story, I was just like, “Okay. I’ll save a little. That makes sense. Don’t spend everything you make. That makes sense.” I remember when I was 16, I decided I would start to record everything I spent on literally a piece of paper. There was nothing fancy about it. I don’t think spreadsheets had been invented or I didn’t know about them. And I remember just every day I would think back through the day and I would log what I had spent. And it was a 16-year-old’s spending, so it was like a Jack in the Box and Taco Bell.
I mean, there was nothing of consequence there. I would go on dates occasionally. And I realized as I tracked my spending, I noticed over the months that I was spending less and less and less, and I would actually drive by the Jack in the Box and not buy it, because I didn’t want to have to record it later on that evening. So, that was kind of my first experience that I kind of self-imposed where I just thought, “Oh, awareness of spending starts to influence spending.” And that is something that I still try and preach to this day.

Scott:
So, what was your relationship with with money like through high school and college? Were you able to accumulate a lot of wealth because of this habit? Or what did that look like for you?

Jesse:
No, I wasn’t able to accumulate any wealth really at all, but I was able to avoid debt, which I think you could say that’s a way of accumulating some wealth. Avoiding going backward is certainly not the same as going forward, but it’s something. And for me and my thinking, I did not want to borrow any money for school. I had had those books that said debt was bad and I thought all debt, like just no debt whatsoever. And so when my wife and I married early, I was 22, she was 21, we married very early and we combined our very meager finances. And I still had three years of school left to get an accounting degree. And she was just about wrapping up. But her degree was in social work where she was going to end up making 10 bucks an hour full-time fully degreed. I mean that wasn’t where money is made.
And so we knew things would be pretty tight, but I knew I didn’t want to borrow money to finish school. And knowing that that was the case that we couldn’t borrow, that was kind of where that spurred me to think maybe I could find some other way to make some money and bridge this gap that we had. And that was where YNAB was born. But my upbringing was middle class. My dad was an attorney, always kind of worked for himself. He wasn’t a big hotshot attorney. He would say he almost begrudgingly did the attorney work, but you can’t make money full-time in gardening. I don’t think so. That would’ve been what he really wanted to do, but he paid the bills.
I never worried about money as a kid, and that is a huge blessing. I never worried about is there food in the fridge? or are things going to be okay? I never had that worry, and that’s a really big deal. But in that way, I just kind of grew up thinking we’re safe and we didn’t have a lot of it, but we didn’t scrape by either. And then look back, you realized, “Oh man, these things kind of started to help me form my opinions and things.”

Scott:
Did I hear that when you have three years left in your degree, you get married.

Jesse:
Yeah.

Scott:
Your wife’s making $10 an hour. Does she have any debt?

Jesse:
No, she didn’t either. She’s just naturally frugal. My wife grew up, I would say poor. She doesn’t like to say that, but she also won’t listen to this podcast, so it’s totally okay. She grew up poor, mom as a school teacher, a single mom, three kids. That story in rural Alabama. And so my wife’s upbringing was one of things just worked out. They just worked out. And because of that kind of this idea that money was pretty hard to come by, I think she held onto it pretty tightly. And she’s naturally just wired to be pretty frugal. So when she came to the marriage, she had a little money saved. I want to say it was over $1,000 or something saved up. And I had spent the last bit of my money on the ring to get her to marry me. We joined forces and had a little wedding money. It helped us buy a computer and things like that.
It was tight and our rent was 350 bucks a month though. So, you can catch up on the expense side a little bit. So we were just making ends meet, but we didn’t know any different. And we were going to make it work. And that was where the idea for YNAB kind of came in because we ended up wanting to have a baby fairly soon, and Julie wanted to be able to step out of the workforce and just focus on this new baby coming in. And that would mean we would lose her income. And I was working part-time for probably 10, 12 bucks an hour as an internal auditor. And I realized that we wouldn’t be able to make it with her income leaving and then mine being part-time and still trying to get through school, I realized we had to have some other solution. And so I thought maybe we could figure out a little side hustle, which we-

Scott:
So you founded the business while pursuing your accounting degree.

Jesse:
Yeah, I founded it back in, it was September of 2004. So it was a few months after the baby was born and I’d been working on it and then launched it. And we were off to the races from there.

Scott:
So when you say off to the races, what did those first few years look like and founding the business? And this is your income and it’s your budgeting.

Jesse:
Yes.

Scott:
I guess, app that you’re building with that. So what does that look like from your personal financial journey?

Jesse:
Yeah. At first, it was a bunch of nothing. It was not newsworthy at all. I don’t know if people know this, but I originally started it by launching a spreadsheet and just selling people a little spreadsheet. And I’d sell it for 19.95 and you’d buy it and you’d get a download link, and that was that. And it was just me. But about six months in, I realized that the spreadsheet kind of it had rules built into it and kind of a way of thinking about your money, that is useful. And so I started selling people more on the way of thinking about the money and less on the spreadsheet. And I noticed that as I started selling people on how to think about the money that sales increased and from very small to small.
And then I met a guy named Taylor who’s now a part owner and he was a developer and he said, “I could improve your spreadsheet. Let me help you do that.” And I said, “No, no, I don’t want to keep proving the spreadsheet. I want real software.” And so this was back in the days where you’d paste license keys into software and activate it and things like that. And so he and I, we hit it off and I went to Julie and said, “Hey you know that money that we’ve been making from the business that we thought would be used for a house down payment…” And here we are in BiggerPockets, so I can mention house down payments and things like that. The whole plan was back in ’06, ’05, it was crazy town.
Everyone thought, “If you don’t buy a house now, you’ll never afford one ever again.” And so we were saving up for this house. And I went to Julie and said, “Hey, instead of saving up for the house with this money that this business is making, what if we paid this guy that lives in Austin, Texas to build a software for us.” And she was okay with it. She said, “If you feel like it’s a good idea, let’s go for it.” So we launched the real software in November of ’06. And that was where things started to really move. But I was working full-time as an accountant at that time and had my CPA license. And I was thinking I’d be a partner in a big accounting firm. So it wasn’t until about a year after that I realized I would much rather run my own business and not do the 80-hour a week grind that was public accounting.

Scott:
Can you walk us through the of thinking about your money that you had come up with or thought about?

Jesse:
Yeah. Yeah. I mean, we call it our four rules. It’s the kind of the YNAB methodology. And it’s essentially rule one is that you give every dollar a job. You don’t leave anyone unaccounted for as far as the dollars go. We do that to have you feel scarcity. People don’t like that word, but I love that word. I think it’s the best word in the English language. You feel like things are scarce and so you are more careful and thoughtful and purposeful with scarce resources. So when you’re giving every dollar a job, you’re imposing scarcity upon your thinking. And that makes you thinking better. That’s rule one. Rule two is to embrace your true expenses. Meaning you want to look ahead, not just thinking about what you need right now, but with you, Scott, it would be like, “Okay, I’ve got Scott here at the table, but I also have like future Scott to care about and think about.”
And so future Scott actually comes to the budgeting meeting and you guys talk about what you need as a pair. So future Scott’s like, “Well, I want to have a new car in seven years.” And current Scott’s like, “Okay, we can make that happen. We’ll set aside a little bit every month for this car.” Or future Scott says, “Well, the roof will need to be replaced.” So, there’s a negotiation between the future version of you and you. And that is rule two, where you’re looking ahead to those larger, less frequent expenses that the future you is concerned about. You break them up into monthly amounts. And now when you’re giving every dollar a job, you’re giving jobs for Scott now that wants to go out to sushi tonight and Scott in the future that wants to go on vacation. So, that’s the second rule.
The third rule is to roll with the punches, we call it. And that means that as needed, you change the budget. And I can’t believe it’s a rule sometimes, but you really do just change your mind as needed. So the last two years now, I was going to say a year, but the last two years have told us that we should be flexible and be ready for things to change. And that’s an appropriate way to approach budgeting. You’re more like a coach making halftime adjustments. Then you are a fortune teller trying to predict the future. Exactly. And then our final rule is to age your money. And it means we would get Scott to a point where the dollar that you earn today, you wouldn’t need for 30, 40, 50 days. That dollar actually gets old as it sits in your wallet or sits in your bank account longer. So those four rules are really what make us unique. And then our software is meant to serve those rules. The software is meant to help you just implement that and think hard about your money and make sure it does what you want.

Scott:
Can you give me more detail on what you mean by age your money?

Jesse:
Yeah. So usually when someone earns a dollar, if they’re living like 80% of Americans, they’re paycheck to paycheck. And so they’ll be paid on a Friday, let’s say, and the next day, they spend some of that money. That dollar is a day old. The day that it enters the system, it’s essentially born. And it’s just a metric for us to track how long a dollar lasts in your hands before it needs to go out and pay a bill or take you on vacation or do whatever it needs to do. And that length of time where you say, “Well, I earned a dollar today, but I won’t need that dollar for 60 days,” in that window of optionality is where all of the stress dissipates. When you’re living on the financial edge, right on the edge, you don’t have time to think, you don’t have the option to choose one thing over another. Your hand is forced.
And we try and get people to break the paycheck to paycheck cycle, where they earn a dollar, they spend a dollar immediately, they have a pile of bills waiting for money. We try and flip that all around and have a pile of money waiting for bills to come along. So that’s kind of the idea of aging your money. It’s a metric that we created that the software tracks for you. You can literally log into the software and it’s like, “Oh, it’s 72 days.” Which basically means you look at how long a dollar lasts in your system and the software calculates it for you to be about 72 days, or whatever it may be, but people can watch that climb. And that’s a good metric for them to recognize whether or not they are living close to the edge or not financially.

Mindy:
One of the questions that I get all the time is where do you put your money while you’re saving up? When you said embrace your two expenses, rule number two, as you’re talking about that, I’m thinking that sounds like capital expenditures in real estate, the large things that you don’t normally buy. Like a roof, you don’t buy that every week, you buy it once every 25 years and it’s $15,000. So as soon as you buy one, then you start saving up again for the next one. So, that makes sense when in your context, but where do you put that money while you’re saving for your own personal capital expenditures?

Jesse:
Yeah, I like actually framing it that way. That’s nice. To each its own, I like to keep things very, very simple and I don’t like to have a lot of moving parts in my life anywhere. And one of the moving parts that I try to eliminate is multiple accounts. So when we are saving up for a new car, we just bought a new car recently, it’s Julie’s car, I should be clear. It’s her car. I can’t say it’s our car. It’s totally hers. But it’s her car. And we saved up for that car for 10 years and that money sat in the checking account. We would just build up right there, thousands and thousands and thousands of dollars. We keep our emergency fund. That’s kind of just a catch all, “Gosh, did we forget something?” That sits in the checking account.
If savings accounts paid more money, I would be maybe inclined to sell a little bit of my simplicity for a little more money, but as it stands, the complexity isn’t worth the trade off for me. Others love to play that game. They love to maximize it. And that’s totally okay. Just make sure that you’re aware of what the trade offs are and the mechanics that you’re kind of introducing in your system. When I run our budget, I’m dealing with one checking count and one credit card. And then all of the categories that all the breakdowns of where things are going for the roof, for the property taxes, for whatever it may be, that’s where I get my information to tell me what the money’s supposed to do. I don’t use any kind of physical account barrier to separate the jobs that the dollars have.

Mindy:
Okay. I can hear people listening to this show right now screaming, “But you’re not earning any interest.

Jesse:
Yes. Very little interest.

Mindy:
You’re not maximizing. You’re not optimizing anything.” I want to say that’s okay. Your job, especially when you are just starting out, your job is to make your finances easy for you so that you can continue on with the program. If you have all these complicated buckets and all of these convoluted things, and you’re like, “Oh, what was I supposed to do with that again? I can’t remember.” You’re going to quit.

Jesse:
Yeah, absolutely.

Mindy:
And what you need to do is whatever works for you, and simplifying is what works for Jesse Mecham, the head of YNAB, you can simplify it too, we give you permission.

Jesse:
Yeah. And I should say, I am a maximizer and an optimizer, but you just have to ask yourself what you are maximizing or optimizing. And I’m not optimizing for dollars at that point. I’m optimizing for, I don’t know, less time spent clicking, which is valuable to me.

Mindy:
Mental headspace.

Jesse:
Mental headspace is valuable to me. Hopefully, you’re always optimizing for something, but you want be clear about what it is that you’re looking for.

Mindy:
Yeah. I just wanted to get that.

Jesse:
And I’ll say like Jesse, 15 years ago, I would’ve optimized for the money because I found the money more valuable than the headspace and that’s totally okay. It changes as your life changes. And when I’m 80, hopefully I’m optimizing for, I don’t know, time with grandkids and not optimizing for anything close to money at that point. So we’re allowed to let it morph on us over time. I think that’s totally appropriate and good.

Scott:
So you said that the business began selling your subscription product into 2006 with the software. Is that right?

Jesse:
Yeah.

Scott:
At what point did it become a full-time endeavor for you?

Jesse:
I dabbled in other things. I flipped websites for a while. I quit my accounting job in 2007 and then went and worked for another company that only lasted four months. They were an internet marketing company that I just didn’t jive with at all, but I was still very afraid of relying on my own income, my own business, to fund and support this little family at the time. It was me and Julie and these two little boys. And in school, I had been taught great accounting, but I’d also been taught that owning your own business was very risky. And that the safe thing was to work for someone else. And it took a long time, like several years of me earning quite a bit of money with YNAB and not living on it, always thinking, “Oh, that’s going to disappear. It’ll go up in a cloud of smoke.”
And I just had to recognize, after a while, I realized that when you run your own business, not to sound too callous, but you are the last person you would fire. And when you’re an employee, you’re not. And it took me a while to kind of get that wiring right, where I just thought, “Hey, this isn’t as risky as I was told to be able to run my own business.” I can always go and look for a job. I could always go and do that. I’m able bodied, I’m smart, I’m a hard worker, blah, blah, blah. But it just took me a bit. So by the time I finally went in on it full-time, full focus and dropped all of my other kind of like little side things, it was five years in after starting the spreadsheet that I did that. And some days I wish it were sooner, but it is what it is. And I don’t think I’d really rewrite anything. There were a lot of lessons along the way that were learned.

Scott:
So, that was in 2009 that you start you went full-time into YNAB?

Jesse:
Yeah.

Mindy:
Whoa! 2009 in the middle of the financial disaster you went?

Jesse:
I mean, for us, it wasn’t a disaster. I noticed an uptick in September ’08 where everything really went south. We noticed little uptick. People were suddenly like, “Oh my HELOC isn’t going to save me,” and, “Bail me out again,” like it had for the mtth time. And people started caring about their money a little bit. So we saw a little bump up as far as activity goes. At the time, we were very, very, very small business. A few employees, and that was it. But yeah, five years until I thought, “Okay, this is the thing. And I’m going to go all in on it. Absolutely.” I honestly didn’t think too much about the macro timing of it. It felt right. And good.

Scott:
When you went into your full-time business and left work, how did you think about your cash management? Did you have a month of cash on hand, a year, six months? How’d you think about that? And did that influence your decision at all?

Jesse:
I hate sharing this part of the story, because it makes me look like an idiot. But when I jumped from my accounting job, and I’ll just tell everyone, I was making 45 grand a year. This was 2006 and maybe that was good money back then. Doesn’t sound great now, really. Working 80 hours a week. If you do that math, you’re like, “Hmm, there are other jobs that probably pay better hourly,” but I was making 45 grand a year there and had this kind of career path for myself. And then my side gig, which was YNAB, I was working on from 4:00 to 5:00 AM every morning, a little more on Saturdays if I was lucky and didn’t have to work. And that year of ’06, ’07, I brought in about 90 grand in profit.
Now it was just me at the time. There was no other employees. My now business partner was just moonlighting at the time. So, I was pretty flush as far as finances go, but to give you even more of insight, Julie and I were living off of 85% of that $45,000 salary. Because I had told her, I said, “Hey, we got to pretend that YNAB doesn’t exist. We got to pretend that this is our salary and this is what we’re going to use.” So we were setting aside 15% dutifully, like I learned in The Richest Man in Babylon, 15% goes to retirement. A penny saved is a penny earned, all that stuff. We were setting aside for that, living in a little apartment. And the YNAB money was again going back toward, “Okay, we’re going to build up for a house down payment,” but we always treated it as if it was just going to disappear at any moment. And it was just my insane conservatism that did that. So we had a bit of a war chest.
Gosh, I’m kind of spit-balling, Scott, but I’d venture to guess we probably had, I mean, definitely more than six months of living expenses set aside. At that time, YNAB was producing profits every month. So I knew that we could live off of that, but I also did take that job for a little bit of time because I was still just a little worried about relying on my own income. I mean, you’re talking about a guy that tiptoed in and tested the water 17 different ways before finally jumping in and being like, “Oh, you know what? I did not have as much to worry about as I thought.”

Scott:
Well, no, I always ask that for folks that start businesses, because I have noticed that there seems to be a tendency among a lot of successful entrepreneurs, it’s not a role, but for folks to build up a huge war chest before actually feeling comfortable making that transition and that leap.

Jesse:
Yeah.

Scott:
And I think it’s just interesting that okay, for you to feel comfortable to move into your own business full-time, you had to be making double that you were at your salary in one hour a day and have six months, maybe more, maybe a year or whatever it was in cash cushioning your position there in order to feel comfortable with taking that leap.

Jesse:
Yeah.

Scott:
And it’s just interesting. We’ve seen that play out a lot of times, not all the time though, with a lot of entrepreneurs.

Jesse:
I don’t know. To each his own. There’s no hard and fast rule there. I think I probably slowed down the business growth as a result of trying to play it so safe, but that’s how I slept well every night. And so I’m okay with how that went.

Scott:
Let me ask you another question. In the early years following that, how did you deploy your cash? Were you investing in other assets or building wealth in other ways with your personal wealth as YNAB was beginning to scale? Or what did that look like?

Jesse:
I would just put it all back into YNAB over and over and over again. The pile would get bigger as it would come back because the business was growing and I would just take that whole pile and just put it back in again. Occasionally, I would pull money out as a distribution and say, “Oh, I wanted to…” When we bought our house in 2008, horrible timing, but we bought a house then. And that was when I took money out of the business for the down payment on the house. Other than that, for years and years, it was just kind of ad hoc pulling money out.
But for the most part, it was always just all the chips go back on. All the chips go back on. Only in the last three, four years have I started to be more methodical with pulling money out and de-risking in that way, so that I don’t feel like I’m just… You can roll the dice at 26 and you don’t feel the same as when you roll the dice at 41. And that’s how it’s supposed to be. So I don’t roll the same dice. I want to play it a little safer and again, always trying to sleep well at night.

Scott:
No, absolutely. Thank you. I think it’s always important for folks listening if they’re thinking about starting a business. How does an entrepreneur think about their financial management? For you, essentially 100% in business for a decade, it sounds like before really beginning to diversify 15 years later.

Jesse:
Yeah. I will say there was a time… I need to make sure that I’m careful on this. I mean, in 2012 and ’13, I pulled money out to buy brand new town homes that I just thought, “Well, this seems like a reasonable price.” And I bought those and still have them to this day. And so that was a way of kind of de-risking there. I also would always maximize mine and Julie’s 401ks at the business. I would just kind of pretend that we were employees. And so we were fully maxing those. Never really thinking that YNAB itself was this growing asset. Always just kind of recognizing, “Oh, I’ll pretend that’s not really a thing. And I’ll just pretend that I’m an employee working here, and I max out the 401ks.” So we would do that. And then that was essentially it as far as… Oh, and paying off the house. That was the other bit as far as wealth building goes where I did want to have my house paid off very, very, very fast. And so I threw a lot of money in that direction.

Scott:
No, I mean, it makes sense. The picture I’m getting is… Let me ask you this. Did you also have a conservative cash position during these years to grow that out?

Jesse:
Yeah, absolutely. I mean, months and months and months of revenue, absolutely. And even buying the real estate that I did, I mean, I would put half down and have tiny mortgages. And then as soon as I had paid off my house, then it was like, “Well, I should start paying off those mortgages.” I’ve always operated from this standpoint of cash is the best thing you can possibly have. Cash is options. And I would just want to have as much of it as is reasonable. And if you make a mistake with cash, you totally still survive. If you make a mistake with debt, that’s going to be tougher. So I’ve always leaned that direction. Maybe it goes back to reading those books back when I was 14.

Scott:
And is your business entirely bootstrapped?

Jesse:
It is, yeah. We’ve never taken outside investment. Just me and Julie plowing it back in over and over again.

Mindy:
I like that you focused on being able to sleep at night. And right now with this new thing out called the internet, you can hear all about meme stocks and crypto. Have you heard about crypto?

Jesse:
Oh yeah.

Mindy:
It’s this really great thing where you can make a trillion percent return in five minutes and that you can’t lose, is what everybody says. And then you see people losing all the time in crypto because it’s not stable. And then somebody is talking about stable coins and I don’t know anything about any of that. I choose not to invest in that because I don’t know anything about it. I don’t want to do the research. I’m doing fine in the stock market. I would not be able to sleep if I took a significant chunk of my investments or my net worth and stuck it into something I didn’t understand. So I like that you’re focusing on things that you can understand and you’re not going out on these crazy tangents and all of this like FOMO is real. No, it’s not. Miss out on some stuff. It’s okay. It’s okay to miss out on Bitcoin going to a billion if you don’t understand it and don’t want to invest in it, then don’t.

Jesse:
Yeah, absolutely.

Mindy:
Sorry. That’s a tangent.

Jesse:
I’m totally bullish on Bitcoin. I think technologically, it’s super fascinating. And if it does change the world, then it will change the world of all of the companies in the stock market as well. And we’ll ride that too. So if you ever are feeling like you’re missing out on something, just make a list of all the things you’ve missed out on so far, it will be so long, and make it exhaustive, make it until your hand hurts. And you’ll just realize like, “Oh, okay, I’ve missed out on far more than I have not.” And you’re okay. We don’t want any of that to drive investment decisions. I will say this though, Mindy, on the point around sleeping well at night, reading all the books you read, The Four Pillars of Investing and The Intelligent Investor, just on and on, you read about Asset Allocation and why that’s so important and how your age kind of determines your risk tolerance.
And this is all very standard stuff that you could go onto a brokerage website and take a quiz and be told these things. I was in my early 30s and I was allocated heavily into stocks and lightly into bonds “as one should be.” And I realized about a year and a half into my 401k being allocated that way, that I was really overly concerned with what the market was doing. And I would look at it and I would think about it and I would see it go up and down. And I realized that my risk tolerance as it relates to equities and bonds and all of that was more like my grandmother’s risk tolerance. I really didn’t want to see it fluctuate a lot. I wanted it to be nice and stable.
So, almost like my man card was having a corner clip. That was the feeling I kind of have, like the super irrational emotional feeling was just like, “Oh, I don’t have the chispa to be able to ride these big market swings. So I’m 90/10, bonds/stocks. And I’m 40.” So that’s very conservative for someone my age. That being said, I realized that my biggest risk was YNAB the business. And I am heavily invested in that. So if you wanted to take the whole picture of my whole portfolio, I’m like 95% in one stock called YNAB, and then 4% I’m in all these tips in all these really safe bonds, and then 1%, I’m in the public equity market, because that’s just how my net worth is all broken down. A little bit of those town homes or whatever in there.
And I had to recognize that I’m taking real risk by running a single business. And I didn’t want my portfolio in the public index invested Boglehead style thing. I didn’t want that to not be representative of the risk I was taking with the business. Everyone needs to make sure that they’re looking at their whole portfolio and not just looking at their brokerage account allocation, or whatever that might be, if hopefully that makes sense.

Mindy:
No, that makes a lot of sense. And when you first said 90/10 bonds, I’m like, “What?”

Jesse:
Yeah.

Mindy:
You’re younger than me. 90/10 bonds, I’m at 0% bonds, but I also own 0% of YNAB. If you’d like to change that feel free, I won’t stop you.

Jesse:
Oh absolutely.

Mindy:
But when you explained it, then that makes more sense. So I can also hear people yelling at the radio saying, “What? 90% bonds? That’s crazy.” That’s crazy, if all of your investments are 90% bonds. I like the way you explained that. So thank you for clarifying that, because yeah, I was like, “Whoa, I don’t necessarily agree with that.”

Jesse:
To be fair, let’s say that it was just someone that didn’t own any other business at all and they really were 90/10, but they realized that 90/10 was what had them sleeping well at night, they will give up returns if history is any kind of indicator, they will give up returns, but that may be okay. That may okay. You really have to be introspective on what your personal risk tolerance is, truly. And I was finding through my angst that I wasn’t respecting where my allocation actually was and my emotional angst was basically surfacing for me saying, “Oh no, this needs to be different than it actually is.” And there you have it. To be clear though, I buy Bitcoin every once in a while and that’s totally money I’m okay seeing go off in a vapor of smoke, that’s totally fine, but it’s small enough that I would never lose any sleep over it if it didn’t go the way that one would hope it would go.

Mindy:
That, I think is very important if you’re investing in these things that are new and is speculative and you put… Jesse owns all of YNAB or most of YNAB. And if he puts $100 into Bitcoin and it goes to zero, Jesse isn’t going to not be able to feed his family. He’s not going to be able to not make his mortgage payments. That’s very different than some of the people that I see talking about crypto, that I know they don’t have a huge investment portfolio, but most of it, or all of it is in this very unstable thing. That’s my biggest problem with crypto.

Jesse:
Yeah, not advisable.

Mindy:
And I don’t want to kick this dead horse anymore, but-

Jesse:
Yeah, not advisable.

Mindy:
… I wanted to get that out. Yeah. That is my big problem.

Scott:
Jesse, you mentioned while we were talking previously that the rules that you have for budgeting could also be used to build a real state business. Could you walk us through kind of how those might apply in a private business, like real estate?

Jesse:
Yeah, absolutely. I actually did this. I do this still with my tiny little real estate portfolio of four properties and they’re all town homes and they’re all managed by a property manager and they’re very hands off. I bought them a long time ago. To give everyone kind of an idea, I put 50% down like I’d mentioned before. And then just slowly, I kind of snowballed the free cash flow that would be generated from all the properties into the property with the smallest mortgage balance. And then as that one paid off, I just kind of kept snowballing it. And now they’re all paid off free and clear and that’s how I like it. When I manage those properties, I actually could use the software to build essentially a P&L for each one.
So, that you’re not evaluating everything kind of in one big pile. So if you have more than a few properties, you probably have a sixth sense for which ones you like the most, which tenants you prefer, who doesn’t call you the most, that kind of thing, but you really want to have an idea of what your profits are per property. And how I set that up in the software is I would just say, “Okay, each property is a category group.” And it’ll be like, “Okay. My rent comes in. My property management fee goes out.” I would set aside a percentage for vacancy. I would set aside a percentage for repairs, and I’m building up, like Mindy mentioned those CapEx situations, I’m building up those repair funds for those individual properties, saying, “Okay, this property address here, we’re going to build up a little.” And you’re giving every dollar a job inside the confines of thinking about that property as kind of its own little unit.
And then you would do that with the next one and the next one and the next one. It is a little cumbersome, but each one of the properties is its own LLC, it’s its own bank account. You do those for obvious legal reasons. And YNAB then allows me to kind of see all of them at one glance. So I’m giving every dollar a job per property. I’m looking ahead toward what those expenditures may need to be per property. I’m adjusting when my property manager writes me and says, “Hey, the dishwasher went out, we went ahead and replaced it. It’s going to be this much.” I can adjust on the fly and say, “Okay, we need a little money here or there.” And then I’m just letting money kind of accumulate in each of those accounts until it hits a threshold where I then say, “Okay, there’s enough excess money there.” I’d pull it out into the what I call kind of our holding company, pull that money out there.
But it allows me to see all the properties P&Ls at a glance without needing to be diving into each one separately. If that makes sense. I only do it quarterly, because it’s pretty boring. You have HOA fees and a few other things going out. It’s not very exciting. But I manage it quarterly and get a good beat on it. And then when it comes tax time, I can just export that all for the accountant. And so far, he hasn’t said, “Hey this is horrible.” So I’ve liked how it’s been going. So, it’s been nice to be able to see the profits of each one separately and kind of know like, “Oh, this one works better for this or that reason.” Minor, super simple, plain vanilla.
But you can imagine if you were flipping or repairing or anything like that where this would be even more important to have really good job cost data per project, what you were doing, how much you were putting in. And YNAB lets you do all that. So I think just because people think that it’s not built specifically for real estate, but it’s built for cash flow management 100%, and in real estate, that is your metric. So it actually has worked very well for me over the years. I mean, honestly I know other people who use it as well for their real estate needs and see, I’d be remiss if I didn’t say that I think it could help others.

Mindy:
I have a personal question.

Jesse:
Mm-hmm (affirmative).

Mindy:
How much do you keep in your reserve fund either for each property or as a group of four properties in terms of monthly expenses?

Jesse:
Yeah. I think I do six months rent per property.

Mindy:
Okay. Per property.

Jesse:
I think once it gets above that, once or twice a year, I’ll pull out any excess from there and move it. And then I just go, I invest that money in my very boring grandmother portfolio allocation. So it all kind of goes back to the same thing again. But yeah, that’s the idea.

Mindy:
Okay. I just wanted to point out Jesse Mecham, a budgeter extraordinaire keeps six months per property of reserve funds. I like to harp on this because I think that a lot of people don’t keep enough in reserves. And it’s different if you have a really high paying job where you’re not spending every dollar that comes in, then you can kind of cash flow the expenses as they come in. But if you’re a paycheck to paycheck person or you don’t have a huge personal reserve, you need to make sure that you can provide the housing that you are contractually obligated to provide by that legal document that you are hopefully signing with your tenants called a lease. I like to make sure that people are well funded and I’m really glad that you are well funded.

Jesse:
The last thing I want to do is have to put in some of my own money and have money flow the wrong direction. It’s confusing. It’s messy. There’s nothing that I like about that at all.

Mindy:
And the even more last thing you want to do is have to swipe a credit card, because you don’t have any personal reserve fund or business reserve fund. And that’s what it is. Real estate is a business. So, don’t even get me started. Okay.

Scott:
I’m noticing a tremendous amount of conservatism, obviously, you’ve mentioned that in all these assets. Do you use debt for any purpose in your life or business? Do you have it, for example, on the business of YNAB to increase returns?

Jesse:
I’ve only ever used debt to purchase homes. So I put 20% down for my personal residence back in the day, maybe 25, and then paid that off. And then when I was purchasing these town homes that we’ve talked about a few years later… And I purchased them over a period of, I think two years. It’s kind of like every six months, I put half down. So I carried mortgages on those, but didn’t have a personal mortgage at the time. And then we ended up selling our house and buying another house and I got a mortgage on that one and then paid that off. And then once the personal residence was paid off, I started working on the town home mortgages and those are now paid off. So I don’t carry any debt at this time. If I saw an opportunity and that was good, I’d probably get another mortgage. I mean, it’s pretty darn reasonable.
I had to tell myself, “Well, if it’s reasonable to buy your house with a mortgage, then it’s probably reasonable within the same rules to pay off your own house and then you’re going to buy a rental with a mortgage. That sounds a lot like you having a mortgage.” So I just never wanted to leverage up so much that I felt like the cash flow was in question. And so I was always looking for a small rate of potential return, but in exchange for that a more guaranteed cash flow essentially. And at the time back in 2012, I found a few properties that did that. Now, I don’t know if I would, so it’s totally different ballgame.

Mindy:
Not where you live.

Jesse:
Yeah. Not where I am. And here I sit not purchasing any real estate for the last little while. So it’s probably a function of that fact, but I don’t look for returns from the leveraging part of the transactions.

Scott:
What’s a day in your life like? You have this financial fortress that you’ve constructed. You’re a very successful entrepreneur with this. What is that is the lifestyle?

Jesse:
Oh, it’s the same as it was 10 years ago. I have a lot of kids, I have seven kids, so you’re like, “Okay, now I know what your life is.” That’s the end of it. Just imagine a total cacophony and then turn up the volume and then you’re about right. Just normal. Nothing special. We like to go on vacation with the kids. So that’s where Julie and I splurge. That’s kind of where we say, “Okay, it’s worth flying nine people somewhere.” You wonder if it’s actually worth it sometimes, but we will do that. But besides the travel once or twice a year, I enjoy being at home. I enjoy the day to day. I enjoy my kids. And I do this thing called parlor time. I declared it parlor time. And they were like, “Dad, what does that even mean?” I’m like, “Well, parlor is like old school word for living room, I guess.” And if you ever read Little House on the Prairie, or some book like that, there’s this romanticized idea of Ma and Pa, and blah, blah, blah.
And it’s like super over the top this kind of farming romanticized thing. And they all sit in the parlor and Ma knits and Pa reads his newspaper and the kids are playing checkers or whatever. I think I’m painting the right picture. And I like that. I like parlor time with my kids where no one’s going anywhere and we’re all sitting in one room, not necessarily talking or even interacting with each other, but we’re all present. Obviously, no phones are allowed in that situation. And yeah, you can just kind of be and have it be slow for a little while. So, an ideal day for me would be you a little bit of that parlor time mixed in there for sure. Nice and slow, nice and quiet. And the kids, hopefully, not at each other and playing or whatever, that sounds like a good life to me.

Scott:
Awesome. What’s next for you?

Jesse:
Oh, I don’t know. I’m trying to get my golf game a little better. One of my sons started getting into golf last year and I was like, “Ah, maybe I should get into golf.” And he’s so much better at it than I am already. And it’s very, very annoying, but I like to do that. I like woodworking a lot. So I’m really bad at it, but I do enjoy it tremendously. So spending time out there with my hands, not in front of a computer screen is really nice.
And then YNAB, I’m no longer CEO at YNAB. I stepped back from that back in April of ’21. And that’s been fantastic. I’ve been able to focus more on things at YNAB that were more kind of what I was interested in. And Todd who’s our CEO is better at a lot of the things that I was not necessarily keen on doing, like a lot of the management stuff. So I’m focusing on getting YNAB into businesses where they can buy it for their employees and maybe have less stressed employees. So that’s kind of a new thing on the business front that has me pretty excited.

Mindy:
I wasn’t aware that you had stepped back as the CEO. How much time are you spending working at your job?

Jesse:
Oh yeah. Normal 40 hours or something-ish. You never track it, really. When you’re running your own thing, you’re never kind of too cognizant of it. I mean, you never turn it off. It’s always in the back of your mind. I’ve been doing this for almost 20 years and I do wonder what it would be like to not have it in my mind at all, because I don’t know what that feels like anymore. I’ve forgotten what that was. But I like what we do. I like how helping people be more purposeful with their money. Your money is just another representation of your energy and all of your effort. And you spend all of this effort and you sacrifice time with your kids and partner and you get an education and you work so terribly hard to earn a dollar.
And all I’m wanting people to do is just to respect that dollar a little bit. Just because that effort is now in the form of a dollar, it doesn’t mean that we don’t give it its due and say that we want to make sure that it keeps realizing what you want out of life. And so we really just want people’s money to help them achieve what they really, really want. Not what you find on some Instagram scroll, but what truly gets you moving? That’s what money should help you do. And that hasn’t gotten old for me. So I still enjoy podcasts like this. I still enjoy coming on and talking about it, because it’s a message that I think everyone still needs to hear.

Mindy:
I completely agree. It never gets old for me either. Jesse, this was a super fun show, but we’re not done yet. We still have our famous four questions. Are you ready? Now, you’re on the hot seat.

Jesse:
I think so. Yeah, let’s go for it. Let’s see what happens.

Mindy:
Okay. Out of all the books that you’ve ever read about money, what is your favorite finance book?

Jesse:
I really liked Your Money or Your Life. And that kind of goes back to what I was just saying. We’re not just talking about money, we’re talking about all of your effort, all of your life that goes into it. So that one resonates with me pretty deeply. And Vicki’s a very nice person. So I like supporting her as well.

Scott:
Awesome. We love that book and we love Vicki Robin. So what was your biggest money mistake?

Jesse:
Buying in ’08, that wasn’t great. But the part that made it painful in ’08 buying that house is we bought a house that was really great and nice, and we loved it, but we couldn’t afford any furniture for it, because I had invested about 80 grand in software that I thought would be the next version of YNAB. And when my now business partner came on board full-time and stopped moonlighting, I had been kind of left to my own devices for a year while he figured out whether or not he wanted to come on full-time and he was working on just his own other stuff. And he came onboard finally, and he took one look at the code that we had been developing and I had been paying for, and it was garbage.
And I kind of had known it, but I hadn’t pulled the trigger and I hadn’t pulled the plug on it. So yeah, we completely scrapped $80,000 worth of lousy software, and I had to go home and tell Julie what we had done and my voice echoed in our house because it was empty of furniture. And I just thought, “80 grand would buy a lot of furniture.” I don’t shop around for furniture ever, but I’m guessing we could have furnished a couple rooms with that money. So, that one hurt. I’m glad we got rid of the software. I’m glad I didn’t let bad money follow bad money, or good money follow bad money, I guess, but that one still kind of haunts me a little.

Mindy:
That one’s hard to do. I mean, you’re not a programmer, so you’re like, “Oh, okay. It’ll work. It’ll work.”

Jesse:
I kept lying to myself. I kept being like, “Oh, okay, I guess that makes sense. But no, it needs to make sense to you. You’re cutting the checks.” You know?

Mindy:
Yeah.

Jesse:
I could go on for 20 minutes on that one, but this is a lightning round kind of a thing, so we won’t do that.

Mindy:
Well, you’re the only person who’s ever paid for bad software. So sorry about that. What is your best piece of advice for people who are just starting out?

Jesse:
Oh man. I mean, this one’s a gimme, because I would just say well, you need a budget. But budgeting is not what people think it is. Budgeting is just planning. It’s just money doing what you want it to do. And that’s it. It’s just you deciding what you want your money to do. That’s a budget. It can move, it can be flexible. It will get you all of your dreams. As one of our support reps cat says to her kids, she says, “You could have anything that you want, you just can’t have everything.” And that’s what a budget does for you. It lets you prioritize and decide, “What’s most important to me?” So work with it and get really clear on what you really want out of life. And then see if money can maybe help you get there.

Scott:
Love it. Track your spending, have it go where you want it to go.

Jesse:
Yeah, absolutely.

Scott:
If you’re listening to the show, that’s the most common advice we get when we ask this question and I think it’s for a reason. It’s the most powerful.

Jesse:
Yeah.

Scott:
Jesse, what is your favorite joke to tell at parties?

Jesse:
Oh man.

Scott:
Or at parlor time.

Jesse:
Parlor time, yes. My kids like the one, because I’m not much of a swear and I don’t swear at all, so they like the one where I say, “What did the fish say when it ran into a wall? Damn!” And the kids love that mainly because they’re like, “Oh my gosh, dad just swore.” So that one’s a good one, but I like the one where there’s a guy that goes to prison, not happy about that, but he goes to prison. He’s with his inmate, his other cellmate, bunk mate, or whatever. And the first night he’s there, someone just yells out, “22,” and everyone starts laughing and he’s like, “Well, that was pretty random.” And then a few minutes later, someone yells out, “14,” and people start laughing even more and he can hear it up and down the cell block.
So he says to his bunk mate, he’s like, “What’s with the numbers and the laughing?” He’s like, “Oh, we’ve been in here for so long, and we got tired of telling all the same jokes, we just numbered them. So now we just say the number and it’s a lot more efficient and quick that way.” So he is like, “Oh, I guess that makes pretty good sense.” And then a little while later, he hears someone yell out, “31,” and like crickets, nobody laughs or anything. And the new guy to his cellmate, he’s like, “What’s the deal with that?” And the guy’s like, “Well, I don’t know. I mean, some people just don’t know how to tell jokes.” I like that one.

Mindy:
That was a good one. I like that one a lot.

Jesse:
That one’s from my dad. My dad’s full of lawyer jokes and that joke. It was a good one.

Scott:
I love it. That’s awesome.

Mindy:
Okay, Jesse, where can people find out more about you?

Jesse:
I’m on a podcast as well and excited to have you all on our podcast, but that’s at YNAB or You Need a Budget, you can find me there. I’m not on any of the socials or anything like that. But if you want to reach me directly, you can email me at [email protected], and I’m happy to respond there. But yeah, that’s it. And if you’re curious at all about the software or what we teach or taking a class from us, just go to youneedabudget.com, and we will help people. We have an army of people that have been through changing their mindset with money and now love to help people change their mindset. And so I’d love to have people join us there as well.

Mindy:
And it’s spelled out, youneedabudget.com.

Jesse:
Yeah. Or you can do yna.com. We own the four-letter one as well, if you’re in a hurry.

Scott:
Thank you so much for joining us today and sharing your money story and a little bit about YNAB. I think it’s a great product and you built a really cool business there. So congratulations, and thank you so much.

Jesse:
Thank you very much.

Mindy:
Thanks, Jesse. We’ll talk to you soon.

Jesse:
Okay. Bye-bye.

Mindy:
Okay. That was Jesse Mecham from YNAB or You Need a Budget. Scott, what’d you think of his story?

Scott:
Again, I think it’s always fascinating hearing from successful entrepreneurs about how they manage their money. And I’ve noticed again, it’s not a universal thing, but it seems to be a trend that there’s a large emphasis on a stable cash position. There’s a much less risk taking in their personal investing because they’ve got this very large financial asset in their business that they’ve run with that. And that is the aggressive part of their portfolio. And so I just think that’s very interesting and it’s worth learning from.

Mindy:
Yeah. When he said he’s 90/10 in bonds, I was like, “What?” But then he explained that the bulk of his investment is in one stock, YNAB. Okay, that makes sense. Because I don’t own a company, I’m not thinking like that. And when he first threw out there, “I’m 90/10 in bonds.” I’m like, “Whoa, we need to talk.” When you have a good reason for what you’re doing, I think that’s the most important. And ultimately, you have to be able to sleep at night.

Scott:
Yeah. So I think he’s got a very effective approach to personal finance. I mean, how could you possibly argue with that? He might be the most successful personal finance person we’ve ever had on the BiggerPockets Money Podcast. So very fun to hear from him and really learn from his approach and the way he thinks about the world.

Mindy:
Yeah. His four rules, I really like those. Give every dollar a job, embrace your true expenses, roll with the punches, and age your money. I think those are great, and I’m really glad that he had the opportunity to share with us today. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 271 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying off we go into the wild blue yonder.

 

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In This Episode We Cover

  • Why budgeting and expense tracking are important at an early age
  • How simple expense tracking allows you to save and invest more while starving off debt
  • The four money rules that will change the way you think about your finances
  • Where to keep the money that you’re saving for emergencies, down payments, and more
  • How to know it’s the right time to quit your job and pursue your passions
  • Running your real estate business through YNAB’s intuitive budgeting
  • Why Jesse refuses to invest in high-risk assets while building his business
  • And So Much More!

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