A few weeks ago I wrote a review of the YNAB personal finance software. YNAB stands for You Need A Budget – gotta love that. Because we all do “need a budget,” a plan for how we will spend our money. Only then can we hope to achieve our financial goals.
YNAB does things a little differently than other personal finance software. YNAB is actually built around a methodology for how to handle money, and there are four rules that are recommended. You can read the full explanation on the YNAB website, but here they are in brief:
Rule 1: Give every dollar a job. This is not an unheard of concept. Everyone knows that having a budget means you allocate your money into different categories and spend from those categories.
Rule 2: Save for a rainy day. Again, this is a no-brainer. There are bills coming due later that we need to start saving for now. If we don’t start saving for them now, we won’t have the money to pay for them later. Got it.
Rule 3: Roll with the punches. OK, now we’re getting into some uncharted water, something I’ve never heard any other financial guru say, and one of the reasons I LOVE this software. “Roll with the punches” means that you are bound to overspend somewhere in any given month, and THAT’S OK. Just roll with it. Take some money from another category and get yourself square before the next month. No biggie. (Another option is to just budget with less money for the next month… but I don’t like that one as well, lol.)
And here’s the one I want to focus on today:
Rule 4: Live on last month’s income. I know it, this is getting a bit crazy. And let me be very transparent here and say that we have not achieved this yet in our household. YNAB claims that their average customer reaches this point in about 4 months, but if they polled my family, we would be pulling that average WAY down.
What does it mean to live on last month’s income? It means that the paychecks you are receiving this month don’t get spent this month. They get saved to use next month. This month you are using the money from the paychecks you received last month. Which means that at any given time, you have an entire month’s worth of money (YNAB calls it a buffer) just sitting there in your bank account. What a concept!
I can see many advantages in achieving this milestone:
A) No worries. Like, literally. Cuz you have so much stinkin’ money in the bank!!
B) You basically have an emergency fund all saved up. If you come up against a big unexpected financial obligation, you could use your month’s buffer to pay for it and then work again towards building up the buffer. This is probably not ideal, but you could do it if you absolutely had to.
C) For those of us with variable paychecks, there is no overspending, because you know EXACTLY what you made last month. You don’t have to guess how much you think the paycheck will be and allocate money you’re not positive you’ll have. You KNOW how much you have, so this month’s budget can be determined with accuracy. Sounds like a nice place to be!
The million dollar question, then, is HOW DO YOU GET THERE? How can you possibly save up that kind of money when you are living paycheck to paycheck as it is? I think the answer is one that we all know already: you accomplish what you set out to accomplish with purpose and intention and priority. If you don’t make it a priority, if you don’t purpose to make it happen, if you don’t work at it with intention, it ain’t gonna happen. And to be painfully honest, I think that’s what’s been happening with hubby and me. It sounds like a wonderful goal, but it also seems rather pie-in-the-sky and impossible to achieve.
But we had another money discussion today. (WOW, that would be point D) to continue from above: NO MORE MONEY DISCUSSIONS. OK, maybe not none, but certainly they would happen far less frequently…) ANYWAY, hubby and I had one today. And it ran along the usual lines: “We spend too much money on frivolous stuff. We must do better.”
Which really is just another guilt trip on both of us that doesn’t actually help us to do better… Saying it does not equate to doing it, y’all, in just about any area of life…
But it got me thinking about Rule 4 again. We’ve actually got a better shot at making this happen than we’ve ever had before, thanks to a recent re-finance during which we skipped a house payment. The new loan is deducting the payments from our account automatically, and I live in fear of there not being enough money in there, so I took the money from the skipped payment and deposited it into the account to be there for the following month’s payment. And I’ve kept a month ahead on the house payment ever since.
So now the trick is to start working with purpose, intention, and priority to get the rest of the budget to follow suit. I’m thinking there are probably several ways to do this, each with the commonality of setting aside something every month until there is an entire month of money saved up:
1) Pay one bill each month twice, first to the payee and the second time to the buffer. So the first month you might do this with the electric bill, then the next month with the internet bill, and so on. This will take a lot of months to build up the full buffer, but it seems like it might be relatively painless.
2) Decide how long you want to take to accomplish the full buffer and divide the amount by that number of months. Then set aside that amount every month until you get there. The problem here is that I’d like to get it done in 4 months (I don’t need to be better than average, but I don’t want to be worse than it!) — and yet that would mean setting aside a rather large amount each month. That would be painful. But at least it would be a fairly short painful.
3) Use windfalls (such as a tax return) towards the buffer. This one has real potential, to my way of thinking. It would be quick and relatively painless; I would just have to give up the idea of whatever else I was going to spend the money on. But windfalls are not predictable, so it might be best to do this in conjunction with either 1) or 2) above.
Right now I’m thinking 1) and 3) are what I can realistically do. Maybe with that combination I might still be done in 4 months! We’ll see. But if not, at least I’ll be working towards one of our financial goals in a planned way. Anybody want to join me? I’ll be writing an update in 4 months (or earlier, who knows?) about my progress. [Want to read the update? Click here: Working towards Financial Goals — Don’t Give Up!]
P.S. YNAB is not compensating me in any way for this post. They don’t even know I exist. I just really like the software and their method and want to share it with y’all. :-)
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