Gravy money is the money you earn, but on which you don’t rely–at all.
If your budget operates under the assumption that your quarterly bonus will definitely happen, and that the quarterly bonus will be used to pay off some credit card debt accumulated in anticipation of the bonus…that is not gravy money.
But if your quarterly bonuses are saved and used to purchase a rental property every three years. That’s gravy money. Gravy money should, most of the time, be used to create more gravy money.
With gravy money, you should never need it, but you should love making it.
In general, I prefer a stream of gravy money over a one-time shot.
In my opinion, gravy money should not be consumed, but should be used to purchase appreciable assets (real estate, alternative investments, starting a business, etc.). That is, of course, after you’re out of debt.
My First Gravy Money Stream
YNAB was my first stream of gravy money. At first, it was totally necessary, and helped us avoid going into debt while I finished school and Julie stayed home with our first (and second) child.
However, once I started my full-time job at an accounting firm, we no longer needed any YNAB money, and it all became gravy money.
We used that gravy money to purchase our first home much faster than we would have been able to otherwise. Thank goodness we hadn’t consumed it to bolster our lifestyle.
I ended up taking a job back in Utah, still afraid to use YNAB’s gravy money for supporting my family. That job lasted about four to five months, and then I realized YNAB could do the trick, and we started on that full-time I think toward the end of 2007.
New Gravy Money
With us now living on YNAB money for our livelihood, my conservative radar was beeping constantly. It didn’t take long before my desire for that gravy money led me to do some other internet-based work, where a friend and I would…basically flip websites. Buy them, make them perform better, and then sell them much-improved. (For those that care, we wouldn’t flip domains, we would flip actual websites.)
We were lucky with our timing, because within a few years, the field became fairly saturated. That gravy money, the buying and selling of websites, is what helped me and Julie pay off the house.
Having that second stream of something that’s (fairly) passive, can make all the difference.
Emergency Gravy Money
YNAB continued to grow, and I didn’t need to take as much out of it to live on, though our personal earnings were still all over the board. During 2009, we were investing so heavily in YNAB 3 that our personal financial situation deteriorated fairly rapidly. Our emergency fund was drained, and right before the launch of YNAB 3, I carried about $25,000 on a credit card.
I used the stream from the buying/selling of websites to keep us from going further into debt. If we didn’t have that gravy money (that quickly morphed into “we need this to stay afloat” money), we would’ve missed our YNAB 3 launch deadline by probably six months.
(A side lesson Iearned here is to never give a public launch date unless it’s something like, “We’re launching Tuesday!” because everything’s in place ready to go. Also, make sure Apple has approved your software before giving that type of public launch date.)
Gravy Money Dried Up, New Stuff Found
The buying/selling of websites kind of fizzled out, mainly because I wanted to focus more on YNAB, and my partner wanted to make some movies.
The lack of gravy money lasted about two months, before I partnered with a developer to begin developing some small iOS apps.
The developer didn’t end up lasting too long, but we launched about five related apps and they all-together, make a whopping $150 per month. (I ended up buying out the developer of his half to simplify things.)
What’s actually pretty intriguing about this small amount of gravy money, is how much I still enjoy it. Apple deposits the money monthly, into a bank account dedicated solely to these iOS apps. It climbs and climbs, ever so slowly, and I don’t give it a second thought. But I still love that it’s there.
More Gravy Money
About a year ago, my old business partner started buying/selling websites again. I didn’t have the time to invest in the nuts and bolts, but I decided to become a silent partner in the operation. That’s ended up providing some gravy money for us. It’s nothing we personally consume in our budget, so it just grows on the side, where I reinvest it there, or dedicate it toward another gravy money stream.
Even More Gravy Money
The stream I’ve been working on currently is with real estate. I am so far from a guru, it’s not even funny, but I’ve felt like there have been some buying opportunities, so about eight months ago I jumped on a short-sale opportunity and purchased our first rental property. I’m extremely conservative in my forecasting, but based on my analysis, the property should cash flow, provide reasonable equity appreciation, and provide a nice tax benefit from the depreciation.
I’ve set up a separate LLC (for liability reasons, nothing else), and bank account. The property manager sends me an accounting each month of any costs, their management fee, and the remaining proceeds land in the account. My plan is to obviously carry a buffer of 3-6 months’ rent, reserve 10% of rent specifically for eventual repairs, and anything above and beyond that high-water mark will be used to accelerate the mortgage paydown.
(A note on carrying a mortgage on the rental property: Dave Ramsey, a guy whose advice I like a lot—I mean, come on, he’s yelling at people all the time to get on a budget!—says that once you’ve paid of your personal residence, you shouldn’t borrow money ever again, even for another house. I’ve never quite understood the logic of this. It seems to me that if it’s too risky to carry a mortgage on a single rental home, then that’s the end of it, and you shouldn’t borrow money for your personal residence either. But this is just a tangent at this point. The fact of the matter is that I evaluated the risk of carrying a mortgage, recognize that we could handle the payment if we couldn’t find tenants for a really long time, and went for it.)
The Amount of Gravy Money Seems to be Irrelevant
I find myself excited at the prospect of fairly small amounts of gravy money each month. I get excited when I see a dividend be paid–even if it’s just a few dollars. I’m excited about a few hundred dollars of positive cash flow from the rental property, and I love seeing one of our website investments earn some commissions.
The size of the gravy money really does appear to be second to the fact that it exists in the first place!
Dual Incomes: Could One Be Gravy Money?
After interviewing many new YNABers in depth, I realized how big of an expense day care is to a lot of families. The search along those lines led me to a book called The Two Income Trap: Why Middle-Class Parents Are Going Broke, and one takeaway I have from that book is that the second income from a spouse used to be gravy, but doesn’t have that designation any longer.
If you have a 3-6 month emergency fund, then when a financial disaster strikes, you’re ready for it. But if you’re dealing with a longer bout of financial strain (job loss, disability), having a gravy money stream could mean all the difference.
Would it be possible for you to consider your spouse’s income as gravy money? Could you two reasonably pretend that the money simply does not exist? Possible? Totally impossible? I’m not even certain, but want to at least plant the idea of you having some money that is not ever needed, which can be used to produce more of its own kind.
Your Business as Gravy Money (to the extent possible)
There are so many “business skills” I don’t possess, but I feel I’ve cornered the market on one, and that is keeping my business separate from my personal finances. Julie used to be confused by statements like, “Man, the business is rocking it this month!” followed shortly thereafter by, “Our restaurant category is depleted, so let’s stay home to eat.”
Those kinds of apparently contradictory statements no longer confuse her :)
The ability to separate the money that’s for consumption, and the money that can be used to create more money, is invaluable.
I’ll give you two examples:
1. I imagine that I’ll eventually sell the business. At least, that seems logical. I’m not banking on the sale of the business, so any proceeds from that hypothetical sale are seen as very distinct from our retirement savings, where we contribute to a 401k and our Betterment account. In other words, the sale of YNAB would be gravy, not something I’m relying on in order to be able to retire.
2. Since I now budget the business money, it’s very easy for me to be motivated to not take any personal distributions. Why? Because if I take money out of the business for personal reasons, I’m eating the seed corn. I’d rather keep it in the business and be able to hire another developer, try a new marketing channel, or maybe just make our company meetup awesome.
In the end, I just want to get you thinking about what could be your gravy money. A portion of your spouse’s paycheck? Some overtime you pick up on a fairly regular basis? Those quarterly bonus checks? Your tax refund?
If it’s gravy money, that means you won’t ever need it, except to purchase appreciating assets (if you’re still paying down your debts, I’d use extra money for that).
You want gravy money to create more of its own kind. Don’t consume it! Plant it and watch it grow!
Post a comment below on what you could use for some gravy money, and how you’d use it to help it grow.