Alright, the title of today’s course doesn’t have that much to do with budgeting, but I was just dying to include it. It does a pretty good job of explaining Rule Four, which we’re going to hit in major depth here. It is, by far, the most elusive of the Four Rules of Cash Flow, but it’s my favorite.
You’ve probably heard the saying, “Just roll with the punches.” It basically means take things as they come. Be adaptable – flexible. The original origin of the saying comes from the sport of boxing: “Said of a boxer: to move the body away from and in the same direction as an opponent’s punches to reduce their impact.”
If you ever watch boxing in slow motion you’ll see the fighters doing this all the time. It truly does lessen the impact, and keeps them on their feet so they can continue the fight.
In budgeting, the same advice holds. So far, we haven’t talked much about how people tend to get pretty depressed and down on themselves when their budget doesn’t work for them. They usually throw in the towel (origin: “The traditional declaration of defeat in boxing, where a second, who feels his boxer cannot continue the bout, throws a towel into the ring to end it.”) Okay. I’ll get off the boxing thing…maybe.
So what happens when you go over budget? Well, nothing. You just roll with the punches. The key though, is to acknowledge the fact that you overspent, without throwing in the towel.
Rule Four is subtle, but here it is: If you budget $200 into the groceries category for MARCH, and spend $250, you overspent in groceries by $50. In APRIL, your total available money that you have to budget is reduced by $50. Your grocery category is zeroed out, and that’s it. Let me stress that you don’t pull the $50 out of your grocery category – you pull it out of next month’s TOTAL available money. If you wanted to, you could budget $150 into groceries to try and make up for it, but there’s no need. As soon as you take it out of that month’s available money, that category overdraft is “paid back.”
That’s the gist of the rule: you pay yourself back for your mistakes by deducting it from next month’s available money.
I’ll tell you that the easiest solution to implement this is to have it done automatically with some software. But again, a pencil and paper will work fine. Some people are much more comfortable with the ol’ no. 2 pencil anyway and that’s fine. That being said, you can See Rule Four in Action:
View a quick demo of Rule Four applied in the YNAB software.
I wish I could be standing there in front of you explaining this concept. I’d definitely be using some hand motions, and my voice would become more urgent as I dove further into the concept. I’d probably have to be standing to make it really come to life. I might even pace a little.
I love this Rule because it keeps people on their budget without punishing them in such a way that they never recover. This rule is in place so that you have a conservative rein on your money. As far as I know, it’s completely unique. I haven’t found it anywhere else.
Let’s look at groceries a bit closer again. If you did overspend by $50 – and DIDN’T zero your grocery balance at the end of the month, you would be living with that mistake of overspending by $50 every single month. What if you budgeted $200 for April and actually spent $200? It’d still show that you had overspent by $50 (even though you technically did what you planned to do that month). The cycle could continue again and again. BUT, if you zero the category and take the $50 from the money available to budget for the next month, you start with a clean slate – each and every month.
Keep in mind that you’re still paying yourself back for that mistake. It is not, by any stretch of the imagination, free money. You DO pay it back. And if you were to continue in your merry overspending ways, you’d eventually go under (we’ll talk about that a bit more tomorrow). But you won’t. You’ll get better and better at staying within your budget and these overdrafts you experience will be less and less frequent.
I’ll spill my guts here. My wife and I have been married four plus years – and we have operated using the YNAB Rules of Cash Flow the entire time. We have never, ever stayed within budget for our groceries. When we first married, we would budget $120 and spend $130. So we budgeted $130 and spent $140. We budgeted $150 and spent $160. We dropped it back to $120 and spent $130. Heck, a few months ago we budgeted $200 and spent $215. Go figure huh? Does it bug me? Nah. Do I wonder what kind of gremlin we have in our grocery cart when we’re shopping? Yeah.
The key is that we still just roll with the punches. What we overspend in one month, we pay back the next. Every category is zeroed that is overspent, and every category that has a surplus carries that surplus forward. It’s masterfully simple. You don’t really even feel what the budget is doing. It just takes you by the hand, makes a few corrections, and leads you gently down a more prudent path.
Alright, that’s it for Rule Four, and Day Eight. I’m sure you’re aware that there are only Four Rules of Cash Flow. So what are we going to talk about for the next two days? Tomorrow I’ll be giving some words of caution regarding the rules. On Day Ten I’ll share with you some closing thoughts, and my own story from rags to…nicer rags.
