Congratulations on making it this far. I’m assuming, of course, that you’ve actually been reading, pondering, and ACTING on the principles taught in days one through six, not just hitting the delete key…

Wow. We’ve covered a lot. I hope you’re beginning to feel the power of the budget. Maybe you’re even developing a bit of respect for that six-letter word. You’ve also realized there is no truth to the lies surrounding budgeting. You’ve recognized the fact that your life, as you know it, will be improved immensely when you stop living paycheck to paycheck and live one month behind your income. We’ve gone through the ins and outs of inflows and outflows. We talked about assigning every dollar a job. And just yesterday we stressed the importance of the Budget Meeting in your marriage. Did you talk with your spouse about it? Where can you improve? When will you start?

Today we’re going to hit the Third Rule of Cash Flow Management: Save for a Rainy Day.

Rule Three can only happen when Rule Two is happening. Remember how you’re assigning your dollars to different jobs? Well, let’s use the over-used example of car insurance. Let’s say your $360 car insurance premium is due every six months. That works out to be $60 a month, right? I know, this is going to blow you away – all the complexity and stuff – but you’ll want to budget $60 into your car insurance category each month. When the sixth month rolls around, guess what your balance will be? $360. You’ll cut the check and pay the bill. No damage done.

View a quick video demo of Rule Three applied in the YNAB software.

But I’ll bet you can remember back a few months ago when something big WAS due – maybe it was your property taxes, HOA dues, or…Christmas. How was it handled? I can’t speak for everyone, but based on what I’ve experienced, if you don’t plan for those high points with the bills, you’re going to get leveled. You were apparently barely making it month to month and then you realized that a $360 big-kahuna-type bill is coming down the pipeline. You probably had to charge it.

That’s all going to change. It MUST change! If you’re spending everything you make every month (even if you ARE living behind your paycheck by a month), you will eventually be carrying large amounts of debt around your neck. You bring home $3,000 – you budget and spend $3,000 each month. When the insurance premium comes due you charge it. Again you bring home $3,000 and then budget and spend $3,000 again. This time though, you have a tiny minimum payment increase because of the $360 charged onto your card. No matter, right? Well, repeat that cycle a few more times, with a few more similar situations and pretty soon you’re sitting there with $12,000 of credit card debt and no apparent way out.

There is a way out. You need to acknowledge the fact that some of your money, though it may not be going out this month, IS going to be doing a job for you. Its job is to sit there until the big bills come due.

What was once a roller coaster ride, is now a smooth highway. This principle, obvious as it may seem, truly works. It forces you to acknowledge in the “good” months (where nothing big is due) that you inevitably have a rainy day ahead. Instead of having eight good months, and four bad, you’re going to have twelve normal months.

Trust me. It’s much easier to handle twelve normal months.

This all appears quite easy when $360 is a fixed payment. But what about something like car repairs? When’s the transmission going to fail? When will the air conditioner stop working? When will your grandpa accidentally break the door handle off of your car while trying to get out, which causes you to have to roll down the window and reach for the outside handle whenever you want to get out of the passenger side (but forces you to show some chivalry when your wife is on the passenger side and you have to run around and get her out so she doesn’t have to roll down the window and do it herself)?

I’ve digressed.

The fact of the matter is this: sometimes the forecasters know it’s going to rain. Sometimes they can predict it with relative ease. Other times, everyone’s surprised. We’re talking about the surprises. You are not a statistical outlier. Neither is your house, your car, or your health. You are going to have some surprises.

These surprises do not constitute an emergency. You KNOW they’re going to happen – you just don’t know WHEN. So you need to start estimating. How much did you spend on car repairs last year? Was that a pretty normal year? Well then how much should you be putting into the car repairs category each month? It’s as easy as that. You don’t have the fixed amount, but you do have the experience that tells you something will come up. Something WILL come up.

Think about some rainy days in your life. I’ve talked about car insurance, Christmas, HOA dues, and property taxes. You may also have club membership dues, self-employment taxes (done quarterly), health insurance premiums, birthdays, anniversaries, relocation, etc. It’s basically anything big that is happening that you can estimate and plan for financially.

My wife and I use software that tracks these balance accumulations for us – but that is not totally necessary. You could just as easily use real envelopes, or write it down on a piece of paper on your fridge, or in your check register. You DO need to track it somehow or it won’t work very well.

Setting aside money each month for rainy days will give you back your sanity and financial peace of mind. I can promise you from my own experience that the money really IS there when you’re living one month behind, and you are actively assigning your dollars to efficient, good jobs. Your money will go further, and you’ll find that you have more than enough to save up for the gray days while the sun is still shining.

Tomorrow we’re going to focus on the sport of boxing. Well, sort of.