One of the often overlooked values of budgeting is the Power found in planned purchasing. There are a few different ways you can look at this Power, and a myth I would like to debunk.

Planned purchasing will help you:

• make smarter buying decisions
• avoid impulse spending
• be rid of guilt when spending

Make smarter buying decisions
What my wife and I have noticed ever since we began actively (not intensively, we’re talking 2 hours per month) budgeting is that we make smarter buying decisions. We are more alert, attentive, creative, disciplined, hard-nosed, prone to negotiating, meaner, and leaner when it comes to giving anyone our hard-earned, hard-working money.

At the beginning of the month, when you sit down together, you simply decide what your dollars are going to do. Within those 15-30 minutes you will also began scheming and dreaming on how you will maximize your dollars work effort. You budgeted $300 for groceries? Well how the heck can we get every dollar of those three hundred to go the distance?

“Jesse, please don’t throw away the weekly ads. I need those so I can plan what we’re going to have for dinner,” my wife might say.

“Man, our electricity bill was pretty high last month. Let’s see if we can’t remember to turn off all the lights.”

“We need to drive to the airport twice this month, we have that wedding that’s two hours away, and Grandma wanted us to bring the baby for a visit. Gas is going to be out of this world! I can call my friend and see if we can’t carpool to offset some of the cost.”

“The baby needs some new shirts. Let’s keep your eyes peeled for any garage sale signs this weekend while we’re out.”

And so it goes. What might have happened? I throw away the ads. Julie ends up spending more than necessary. We don’t acknowledge the increase in electricity and simply chalk it up to a “woe is us” type of attitude. We get nailed in gas for the month and could have totally avoided it. We pay full price for shirts that will be useless in six months (or until another one comes along at least.)

When you plan your purchases you think, plan, strategize and maximize your dollar.

Avoid impulse spending
When a plan is in place you have a reason not to go off and blow some money on an emotional whim. If you have no plan, there is no reason. And when there is no reason, there is no motivation. Without motivation, there is no A C T I O N!

Let’s face it. We’ve all been there. We’re depressed, exuberant, lonely, excited, happy, sad - whatever - so we want to spend some money. Or maybe you’re out grocery shopping (with your list even) and you see some Ben & Jerry’s ice cream. It wasn’t part of the plan. It’s much easier (I’m not going to say it’s easy) to walk away. Not part of the plan man.

A plan is a roadmap to a goal. Your goal (perhaps New Year’s Resolution) may be to get out of debt, save for a downpayment (a big one) on a home, invest more for retirement, help your children with college, etc. It’s not nearly as important exactly what type of goal it is. It’s important that you have one. And to reach that goal, a plan is absolutely necessary.

Be rid of guilt when spending
Did you plan to buy a portable DVD player this month? Great! Do it! Rest assured that a planned purchase is usually a reasonable purchase because of the thought, time, effort, strategizing, etc. mentioned above. Please don’t feel bad if you’re spending planned money!

As a matter of fact, there’s nothing that feels quite as good as going out to eat to a really nice restaurant where you know going in that you can order pretty much whatever you want on the menu. Want to be daring and get a soda? Go for it Want dessert? Maybe two? Sure. How about an appetizer? Of course.

Guys: while you were budgeting at the beginning of the month, did you not exert all negotiating skills in your power to make sure your wife was on board with the fact that you needed a new drill set?

Ladies: while you were budgeting at the beginning of the month, did you not exert all influence in your power to make sure your husband was on board with the fact that you needed a new outfit (shoes are part of the outfit)?

Then promise me that when you actually purchase these (or some other things w/o the stereotype) that you will not feel guilty doing so. The Power of planned purchasing is that you agreed with yourself, or agreed with your spouse if you’re married, on what you would be buying. The power of a zero-based budget is that you are faced with the fact that you have limited resources and cannot consider debt as a viable way of increasing your resources (it does just the opposite). With the zero-based budgeting principle firm in your minds, these fun purchases can be a part of your money life. They should be.

I’m spontaneous. Budgeting ruins that.
I’ll admit that as soon as you plan to purchase something, it no longer can fall under the term spontaneous. However - can’t you plan for spontaneity? I’m not saying you plan for every purchase, I’m saying that you plan for the fact that you aren’t going to plan for every purchase - that you will be spontaneous.

So just estimate it. When you’re budgeting at the beginning of the month, give yourself a bit of room in the “Miscellaneous” category or “Fun Money” category. Heck, make a “Spontaneous” category if you want. If you don’t have a lot of “room” in your budget, then you don’t have a lot of room for spontaneous purchases and will need to face that reality. If you have a bit more room, you can afford some spontaneous splurges.

The deal is this though. Planning your purchases at the beginning of the month makes your money work harder. You will see your money S T R E T C H to do what it needs to do. It’s almost magical. It’s powerful. It works.

Take ACTION!

A few customers have mentioned it would be nice to have some type of marker on the Budget sheet that shows which category you’re dealing with when you’re budgeting. I thought this was a nice idea for an optional add-in. Here’s a little shot of what it will look like once installed:

1. With YNAB open, press Alt+F11
2. You’re now in the Visual Basic Editor. On the left side there is a pane called “Project - VBA Project” (if it’s not visible press Ctrl+r). Double-click on Sheet2 (Budget)
3. A white page will open to the right. There are two drop-down boxes at the top of the just-opened page. In the left drop-down box select Worksheet
4. The right drop-down box should automatically say SelectionChange and you should see two lines that have automatically been entered: Private Sub Worksheet_Selection… and End Sub.
5. In between those two lines, paste the following code:

   If (Target.Column >= 2) And (Target.Column < = 78) Then
If (Target.Row <= 126) And (Target.Row >= Then
Range(”A8:A126″).Interior.ColorIndex = 15
Range(”A” & Target.Row).Interior.ColorIndex = 38
End If
End If

6. Click the Save button in the Visual Basic Editor and close it.

Note that this is for version 2.02 3.0 or later. Give it a test run and see how you like it. Any modifications are, of course, totally up to you.

Just in time for the New Year switch I hope, I’ve added some nice functionality to YNAB that will have you budgeting just a bit quicker:

• You can now use drop-down menus to select the category for the Outflow, instead of having to switch back to your Budget sheet to remember exactly how you spelled “Miscellaneous Riff Raff and other Sundry Expenses” or other various categories.
• You can also use the drop-down menu to select the Type of Inflow. It should save a bit of time, and clear up some entry errors.
• The principle of savings accounts has been reenforced just a little bit. When you enter an Outflow for a Savings-type category, that does not mean you spent any money - it means you physically moved the money from your checking account to a mutual fund, emergency fund, retirement fund, etc. You now mark all savings acccounts with an asterisk so that outflows for those categories do not count as expenses on the income statement from the Overview page (they inappropriately included all outflows before).

If you’re a previous customer, this update is free to you (as all updates are). If you’re a customer mulling over your choice of budgeting solutions for 2006, stop mulling. This is it!

This is part III of a four-part series on budgeting. So far, we talked about freeing up cash flow by budgeting. Once you’ve budgeted and have that free cash flow…flowing…you’ll have a few options with what you can do with it:

1. Give it.
2. Have fun with it.
3. Invest it.

Today we’ll talk about option #2 (perhaps your favorite?): Have fun with it.

Let’s face it, you need to have a bit of fun with your money. It’s vital to a functioning financial situation for you and your spouse (if you’re married). You might ask yourself how I can talk about having fun with money when, throughout this site, I push saving, investing, making your dollars really work for you, etc. What I’ve discovered is that if you don’t have some much-needed fun with your money, you end up throwing in the towel on your finances completely.

And we can’t have that.

A few personal stories to draw the point. When Julie and I first began our budget (you should have seen the YNAB System at the first…woah…wish I had some screenshots of that ugly baby) we were totally fired up about saving money, watching every penny, staying out of debt (I had three years of school left at the time), etc. We were going to live like paupers.

We were successful for, oh, about two weeks. It happened to me first though. I started feeling kind of depressed. Perhaps that’s too strong of a word. I started feeling a bit down, kind of closed in when it came to our money. I felt like I couldn’t buy anything. It all had to be justified. It all had to have strong arguments going for why the money was being spent in the first place.

I couldn’t have bought myself an ice cream cone without permission.

I approached Julie about it and she confessed that she was feeling somewhat the same way. She too felt a bit down, closed in, unable to really relax at all when it came to buying something she just wanted. So together we came to the conclusion that we needed some fun money. And more importantly, each person needed their own fun money for which they alone were accountable.

We each received $5 per month.

Is that fanatical? Probably still. But only a fanatic would sell a budgting system in the first place. So sue me. But my point is not how much breathing room we gave ourself (it will vary greatly for each person and/or couple). My point is that the $5 we each received literally cured the problem we were having with feeling just a bit too restricted.

I could now save my $5 and purchase a used book every two months or so. Julie could save hers and buy a pair of jeans. If I wanted to get something at the vending machine, I did it (you shouldn’t eat food out of vending machines for other reasons we won’t get into here). It was liberating! And necessary.

I was teaching a class last Friday morning when a lady in the back raised her hand and confessed she was the “Free Spirit” in the relationship. I asked her how her husband reacted when she would spend money and she said he would, “yell, scream, maybe cuss on occasion.” I had figured as much. The problem is that this “free spirited” lady wants a bit of breathing room and this guy wants too much control. Both need to compromise and come together in the middle. Sitting down at the beginning of the month to agree on each dollars’ jobs would go a long ways in ironing out these marital (yes, it’s a marriage problem more than a money problem) issues.

I don’t think this lady would mind having some spontaneous money to spend without the guilt or fear of her husband hovering over her. And I don’t think this husband would mind having a bit more control over the household spending (through monthly meetings).

Consider couples A and B. ‘A’ uses a budget and goes all out, really nose-to-the-grindstone tough. They don’t allow themselves even the slightest fun or enjoyment. It’s all about saving, saving, saving…

Couple B also actively budgets. But they make sure to set aside some fun money for the family, and some for each other (I call this “Blow” money because you can blow it wherever, for whatever you’d like, without having to fess up to anyone for anything).

In the long run, Couple B will be in a much stronger, longer-lasting financial situation. They have balance and that is key.

Now, don’t get me wrong. I’m all for short bursts of unbelievably crazy and focused intensity when you need to get something done (like saving one month’s expenses). But remember to back off, have a bit of fun, regain your balance, and move forward. You can’t take your money with you - enjoy it while you have it. The key is simply to plan your enjoyment, such as vacations, cruises, movies - even the spontaneous stuff can be planned - so they don’t become a burden.

In Part I of this series on Budgeting, I talked about finding cash flow. I mentioned that Dave Ramsey says there are three things you can do with money: give it, invest it, and have fun with it.

Today I wanted to talk about giving it - which should always come before the other two (if it doesn’t, you find it is usually quickly forgotten).

There are three aspects of giving I want to touch on this morning:

1. Gratitude
2. Empowerment
3. Perpetuity

Gratitude
One aspect of giving that simply cannot be ignored is the strong sense of gratitude that is felt by the giver. I have personally felt this in my life. When you give to others, either through a charitable organization, a friend or neighbor in need, or through a church, you feel a sense of gratitude for what you do have. When I feel that gratitude, that contentment for my lot in life, I find that I am “needing” less.

I use the word “need” with caution there, because it is amazing how quickly a Want can quietly slip into a telephone booth, whirl around a few times, and come out in its flashy cape with a large “N” mounted on its chest. Suddenly that Need appears desirable, noble, necessary, and enticing. It’s still a “W” - regardless of what kind of costume it’s wearing.

These false needs that are developed come from what some would call an overexposure of advertising that we subject ourselves to. Advertising is bent on pushing us out of our zone of contentment. We suddenly need, need, need…

But when we give, we feel gratitude for what we have, have, have! That is one strong reason to give. You will be grateful for what you have.

Empowerment
When you give, you are empowered. You instantly become the master of your money’s fate. When you willingly take some of your hard-earned dollars, set them aside, and give them away with no strings attached, you become the Master of your money.

One church I know of does something seemingly counter-intuitive. When they’re helping someone in need financially (providing work, food, clothes, etc.), they encourage the recipient to continue paying their tithes.

Why?

Because it is empowering to the individual who, at this time of great need, is probably not feeling too confident in themselves. Giving restores a possibly repressed self-respect and confidence in the person. When they give freely, they are empowered and know that money is not their master. They are ultimately in control. That feeling of control and mastery over money is the key.

When you are giving, you are also empowered with a sense of freedom. You no longer feel you are a slave to your money and/or its obligations. You decide what you will do with your money. And by consciously giving some away, you show money that you don’t need all of it. You can get by on less. That’s so crucial! As soon as you realize that you can truly get by on less than you earn, you are in control!

Perpetuity
I don’t know exactly how it works, but it just works. When you give, it is returned to you. It seems to be some sort of perpetuity. It seems to have no limit to its supply. I don’t know if the perpetuity factor comes because you are empowered and become more creative with your resources, or because you are grateful and need fewer resources to have what will bring you contentment, but either way you look at it, giving is a great investment for the giver!

I’m reminded of John Bunyan’s couplet:

A man there was, tho’ some did count him mad, The more he cast away, the more he had.

I challenge every reader of this article to set aside an amount you feel is appropriate, and to give it away - no strings attached. Do it anonymously if at all possible. Give enough that you have to sacrifice something for yourself in return. Not only will you be filled with gratitude, and empowered over your money, you’ll also become a bit more selfless. And we could use a lot more of that these days.

I’ve decided I’m going to focus on the various advantages of budgeting. Yes - I call it budgeting. Yes - it involves writing down what you spend. Yes - it means you can’t spend willy nilly without reaping the consequences (well, you’ll reap the consequences whether you budget or not). Yes - it means you might turn a bit nerdy on your friends.

Yes - it means you’ll have money. Probably more than enough.

Once you become a master budgeter, you’ll naturally gravitate toward doing something with all of that extra money flying around your house. Dave Ramsey suggests three things that can be done with extra money:

1. Give it.
2. Have fun with it.
3. Invest it.

I like Dave’s approach, and through the next three articles in this four-part series, we’re going to be talking about each aspect in detail. But first, we need to find that extra money.

If you’re using the YNAB system you’re well aware of how it works. You lag one month behind earnings, give every dollar a job, save for rainy days, and don’t beat yourself up (well, not really) over any mistakes. When you implement these Four Rules of Cash Flow you end up with cash. Period. You’ll have it. EOD.

But I don’t make that much money.

There are two ways to address this concern. One is the “I don’t believe you approach” that I use on ocassion. My reply is, “Yes you do.”

“No I don’t.”

“Yes, you do.”

And round and round we go. No, not really. With the “I don’t believe you approach” I’m simply trying to point out that most people are making enough money. They just don’t know where it is, what time it’ll be home, what the heck it’s doing when it’s out, and why it leaves so quickly. Yes, much like a teenager, it tends to do its own thing unless there’s a bit of structure (okay, a lot of structure) imposed. You’ve got to set a few ground rules. You’ve got to get on a budget.

It’s amazing, but these “No I don’t” people are usually so wrong! They do have plenty of money. It’s fun to see them realize that. That’s why you’ll hear people say that budgeting is like “giving yourself a raise” - it truly is. And with a raise comes cash flow.

Another way to approach the concern of not having enough money is to agree. They really, truly, may not have enough money. This needs to be addressed in both aspects of the money equation:

They might need to increase their Cash In while simultaneously working on their Cash Out. Inevitably, people who really do not have enough money tend to write off their cause as lost. This is wrong! The fight is never over! The war is never lost! When a person with truly low income begins budgeting it is empowering. I promise that it sparks creativity not just with cutting expenses, but also with increasing income. The budget is a reality check - it’s like a tough friend who will tell it to you like it is. A lot of times, this is just what a person may need.

So whether you don’t think you have enough money and are wrong, or think you don’t have enough money and are right, you still need a budget.

I promise you that as you implement the Four Rules to Cash Flow you will find that extra money. You will experience that raise. You’ll be able to face the music. But the great thing about becoming a Budgeting Master is that you can then hold the baton and do the conducting.

It’ll sound great.

I posted just a little while ago about how ING had raised their rates .1%. Well this time they’ve gone a bit further. You’ll now be getting 3.75% on your money that sits there. It might be a nice place to stash a large portion of your emergency fund.

On a related note, Emigrant Direct is offering 4.0%. I don’t (yet) have any personal experience banking with them, but I hear from others that it’s pretty much the same - with only the application process being a bit slower.

Start your emergency fund at 3.75% or 4.0% today. The key not being the interest rates, but the word today.

Sure Christmas is coming up in 22 days, and we’re probably all a bit focused on everything that has to do with Christmas. But, you do realize, that just seven days after Christmas you’ll have 2006 staring you (blankly?) in the face.

What will you do with it?

I love to exercise. I don’t love running (although I do it), and I don’t love the elliptical machine - as a matter of fact, I really don’t enjoy cardio work that much unless it involves some type of competitive sport. But weight lifting? This I love. I won’t go into all the reasons I enjoy lifting, but I would like to make a point with it - and hopefully tie it into New Year’s Resolutions, goals, and budgeting somehow.

On the first Monday morning of January of 2006 I’m going to walk into the gym. It’ll probably be about 5:15 or 5:30 am. It’ll be cold outside. I will have probably needed to scrape the car’s windshield. I’ll walk in wearing gloves, a stocking cap, a sweatshirt with the hood on, etc. - all in an effort to stay warm during the three minute drive to the gym.

And I’ll be shocked at what I see. Instead of the usual four people, there will be twenty.

Next Monday there will be 16 people.

Next Monday there will be 10 people.

Next Monday there will be 8 people.

Next Monday there will be 5 people. One person made the cut. We’re now 4 + 1.

It happened last year. And I expect it to happen again this year too.

It’s the age-old story with New Year’s resolutions. You start 2006 with fire to your feet, a skip to your step, a whistle to your work - and the fire dies, the old step returns, and the whistle fades. Too fast!

The secret to being one of the four at the gym is to decide where you want to be in a year. What do you want to accomplish during the year? Write it down, then break it up. Let’s move away from the exercise example and get into a hypothetical with personal finances. How should you plan your 2006 assault?

Long-Term Goal - 12/31/2006 Increase net worth by $18,000

So, on June 30 of 2006, where do you want to be?

Mid-Term Goal - 6/30/2006 Increase net worth by $9,000

That would necessitate yet another step…

Short-Term Goal - 3/31/2006 Increase net worth by $4,500

And the pattern continues…

Mini Goal - 1/31/2006 Increase net worth by $1,500

And now we get to the meat of the matter. What will you do next month, in January, to meet this goal? These are your micro goals - and they’re crucial to your Long-term goals. They’re truly where the rubber meets the road!

Micro Goals from 1/1 to 1/31/06 to increase my net worth by $1,500

I will:
• Contribute 6% of my salary ($250) to my 401(k) for the company match ($125): $375
• Invest 9% more of my salary to max out my Roth IRA: $375
• Work four hours of overtime each week: $576
• Reduce my phone bill to just the necessities and actively save the difference: $40
• Start bringing my lunch to work and actively save the difference: $80
• Sell the set of golf clubs I never use: $160

Estimated net worth increase during January 2006: $1606

And on January 30th, instead of sitting down after work (where you put in two hours of overtime) in front of the TV to “relax”, you’re going to be proactive (to use a term of Stephen Covey) and assess your goals. Did you reach them? Yes - by how much? No - by how much? How will February need to be any different? How will you reach your February goal of another $1,500 dollars? And you begin to create your micro goals for February. Some will be the same, some will be different. The phone and brown-bag savings are now on auto-pilot because you have ING or some other online bank withdrawing that incremental savings monthly. You’re used to taking your lunch to work now, but you’ll write that down again anyway - as that’s still a savings. The 401(k) is done through your paycheck - along with the match. Your other 9% may also be on auto-pilot by any number of mutual fund/brokerage houses.

Are you still going to work overtime? Then write it down. How will you come up with the other $50 to get to $1,500 this month? Perhaps you could eat out once or twice less. Maybe you need to cancel the lawn service. Maybe you should eek out two more hours of overtime during the month. Is it time to hold a garage sale?

This is how the process should work. The key is to break your long-term-extremely-far-into-the-future-you- have-plenty-of-time-to-get-it-done-goal into smaller, bite size pieces. Then you take it even further and write down an action plan for each month (each week if necessary) to ensure that you take the appropriate-sized bite. You write down your goals in a memorable place (fridge, bathroom mirror, dresser, etc.) and remind yourself of them often.

This is the key for those four people that come to the gym day in and day out. They set long-term goals. They break them down. They decide on their micro goals (their action plan) and they execute on those each day. At the end of the month they turn around, evaluate the month and - with that knowledge - turn and face the new month, set their goals, and execute.

This has been live on the site for about a week and I totally forgot to mention it here. Thanks to a tax class I’m about to finish (tomorrow morning I’ll be trying to figure out how to do a corporation’s income tax provision for their financial statements…), I was able to glean quite a bit of knowledge about the US personal income tax. We were supposed to make a pretty simple spreadsheet to calculate some stuff.

I took it a step further so I could provide it to customers:

My personal favorite thing about this new bonus is the “?” feature. I did a bit of digging (okay, a lot of digging) and found tons of releveant IRS information on the various line items of the 1040. So when you click on the ? you should be brought to the IRS information on the web concerning that line-item. That should help you determine if your cousin’s wife’s mother’s sister’s father-in-law, who lived with you for 7 out of the last 12 months, and for whom you provide 69% support, is a dependent (and other fun things).

Yes, it’s called the Tax Forecaster - a momentary lapse of creative juices perhaps. Although Mortgage Analyzer, Retirement Planner, Debt Snowball, and Car Maintenance Schedule certainly aren’t much better.

I suppose it’s the functionality that really counts though - and they all have function.

If you’re a YNAB customer you are, of course, entitled to anything new I release. You can always contact me to get a copy.

I’ve never been able to talk to people that decide not to purchase the YNAB personal budget, but I wonder if some of the hesitancy in using the system doesn’t stem from the requirement of Rule #1.

You’re strongly encouraged to save one entire month’s expenses (how can I manage that?).

What to you do if you don’t have one month’s expenses saved? You enter all inflows as “supplemental”. That allows the inflow to hit the current month, instead of the following month. You will have to deal with a few disadvantages if you operate without a buffer:

1. You don’t have the piece of mind of living one month behind your income
2. If you overspend, you’re more likely to overdraft because a buffer isn’t in place. It’s still not very likely, but it is more likely.
3. You will need to budget each time you have a significant inflow instead of just at the beginning of the month.

So why do I encourage it so much? Can you get by without it? What are the advantages and disadvantages of doing it? I hope I can answer these questions in regards to what I think is the #1 budgeting tip: saving one month’s expenses.

The Origin of Rule #1
You might want to throw tomatoes at me when you realize how easy my wife and I had it when we first implemented the rules of YNAB. Unlike many of you, who I’ve pushed and prodded to get your one month’s expenses saved, we already had ours. And I’d like to thank every single person that gave us money on our wedding day for it - because that was where most of the money went - nowhere (it stayed in our checking account).

I married Julie in February of 2003, so it still hasn’t been too long ago, but I remember vividly thinking about our future financial situation before we were married. I was slightly worried. I might have mentioned this a bit in the About Us section of the website, but it bears repeating here. Basically, Julie had another semester and a half of school left to get her bachelor’s degree in social work. I’m still not done - had three years of school on the horizon at the time of our marriage. Julie was working at the University Library, I was teaching German to missionaries. Combined we were making about $18 per hour. But we were only working 20 hours per week (I’ll save you the time of calculating it: annually it works out to be about $17,000 per year), because we were both full-time students.

I don’t want any pity here, this is to draw a point.

And the point is that it would’ve probably taken us two to three months to save the buffer. We had it easy because we exercised some discipline and didn’t spend the money on a new Kitchen-Aid Mixer, or anything else for that matter - it just sat in our checking account.

Our buffer was in place.

With my worrying about our finances, I decided to construct an Excel spreadsheet that would help us track our spending. Later on I realized we should probably track our income. Much later I decided we would track our account/savings balances (which I’ve discontinued, it isn’t worth it). I had a row on the sheet for every day of the year, and a column on the sheet for every category. There was absolutely nothing dynamic about it. If you’re a 1.0 user, you’re seeing some of the dust from that legacy system set up long ago. 2.0 users see something entirely different (and better).

One night, Julie and I were talking about the money issue. I asked her the question, “Since we don’t know if we’ll be working 18, 20, 22, or 25 hours each week, how are we going to know how much we should budget each month?” She didn’t really have a good answer. I certainly didn’t.

That night I realized we could take a month’s worth of expenses from our wedding money, stick it in the checking account, and live on that for the current month. The following month, we would live on last month’s income. I talked the idea over with Julie in the morning and she was all for it (bless her conservative heart). The buffer was born.

Advantages of the Buffer
Using our personal experience, I want to highlight some of the advantages we’ve experienced living with the buffer that has kept us out of the paycheck to paycheck rut. I’m sure you will have similiar positive experiences if you choose to live by this rule.

Fiscal Conservatism
I’ve noticed that the buffer imposes some pretty conservative limits on you. If you have a blow-out month as a real estate agent, where you make twice your average in a month, you don’t go blow your money on something unnecessary. The reason being? If June was your hot month, you can’t even touch the money until July. Time tends to dampen (I might even say correct) some of those wild desires you have when a Franklin or two hits your palm.

I interned temporarily this last Winter semester full-time, and made a lot more money than I do working part-time at my current job (no, YNAB is not my job :)). January was a great month for us, and February was even better. But because we had these “windfalls” not hit the budget until the following month, respectively, we exercised a bit more discretion. We didn’t spend any of that money until we had sat down and budgeted for the month. That helped us be conservative and smart with our money.

The Variability of Income
As you certainly have already picked up, when you spend last month’s income this month, you know what you have to budget and you budget and spend/save that money. There’s no guessing, averaging, forecasting, wondering, hoping, dreaming, etc. The month is gone. Here’s what you have to spend. Be wise.

I address this advantage in a bit more depth here.

Financial Crunches are Gone
When you have one month’s expenses at the beginning of the month, before you’ve earned any money currently, you’re sitting on a nice, plush, cushion. It feels good! Others can certainly attest to that as well.

You notice when you have flexibility, when you aren’t toeing the line of financial crisis every minute of every day, that you make better financial decisions. You aren’t rushed. You aren’t worried. Emotion plays only a minor role in your decisions (verses the only role, if you’re stressed), and you can trust yourself to breathe, take a step back from a situation, and make the correct choice.

You couldn’t care less if all of the fixed expense bills come due on the first of the month. You have the money to pay them. No more worrying about when your next paycheck will be deposited, when the rent is due, etc. If it happens in the month, you’ll take care of it during the month (I’ll address expenses that come in larger chunks in a later article).

A Disadvantage to the Buffer?
A few naysayers have brought up the point that lagging behind a month with your income, also means you lag a month behind in your saving. If, in July, you take-home $3,000, you don’t actually do anything with that money until August. That means potential savings dollars sit in a non-interest bearing checking account (maybe it does get .0025% interest or something like that) without making you any money.

I’m all for your money earning you more money.

But you need to remember two things: most retirement investment is automatically deducted from your paycheck into a 401(k) or Roth, or Traditional IRA. That means that money is never even hitting your budget in the first place anyway. In 2.0, we moved to recording only your take-home pay (excludes possible life insurance, health insurance, retirement, and extra tax withholdings, among other things). This move has saved us all lots of time. So no - your savings isn’t lagging.

And if you don’t have your savings on autopilot and do manually initiate the transaction each month (which is totally fine, although not my preferred choice), you still are only lagging behind one month. Which is miniscule when taking a step or two back from the situation and seeing the forest, instead of just a few trees.

Conclusions
The one month buffer is a strong, strong component of your financial system. It keeps you conservative, and flexible, removes the problems of budgeting with a variable income, and saves you stress from living on the edge.