Okay, today I’m going to cut to the chase. Day Two was a bit longer than I wanted it to be. Those dirty rotten lousy lies get me going every time.

We’re going to roll up our sleeves and get to work today. Now we’re starting to get into the How of the budget. We’ve talked about the whys, and we’ve talked about the lies…and with that lovely couplet, I’ll stop rhyming.

Albert Einstein once said that the definition of insanity is doing the same thing over and over while expecting different results. He was a pretty smart guy by my book, so we’re going to springboard off that thought as we discuss the first Rule of Cash Flow.

When my wife and I first married (it’s been a few years now), we worked part-time at the university where we were attending school full-time. Part-time work on a university campus equals, well, not a lot. I wasn’t TOO worried about things, but the fact that our finances would be tight did inspire me to construct a spreadsheet to help us track our spending. Eventually I built it so it would also track our income.

The income was where the problems started arising though. Julie would work anywhere from 15-22 hours per week, depending on exams and homework. I would do my best to work between 18 and 24 hours, but again, that could change based on other uncontrollable factors. We were living on a variable income.

So how do you budget when you don’t know what you’re going to make? While a lot of financial gurus will suggest that you prioritize your expenses and always pay the top ones first, there is a better (initially harder, more fulfilling, and eventually easier) way.

You live on last month’s income.

Now I’m going to spend the rest of the time trying to convince you that it IS a good idea.

Keep in mind though, that you can still use YNAB without having your one month’s expenses saved. It’s explained in the setup guide. I DO want to encourage you to work toward living by Rule #1 as fast as you can. It really is quite lovely – like a barbeque on a warm summer day…

If you’ve been on the site for more than five seconds you’ve seen this rule. You really should stop living paycheck to paycheck and begin living on last month’s income.

Click here to see Rule One in action with the YNAB software.

How did we, two struggling college students do it? I’ll admit, we had it kind of easy. Since our wedding had just happened a few months before, we had wedding money sitting in our savings account. I withdrew enough to get us through March without touching March’s paychecks. That’s exactly what I’m going to ask you to do. You need to make it through one month without using that month’s paycheck(s). You may need to get a little intense to get it done.

Remember Albert Einstein. If you want to stop living paycheck to paycheck, and enjoy the benefits of MUCH more flexibility in your finances, if you want to be able to budget easily and accurately, you’re going to have to start doing something different.

Again, the trick is to make it one entire month without touching your paychecks. If you’ve already done it, you’re in like a dirty shirt.

How do you manage to get by for a month without touching that month’s paychecks? Well, that’s pretty much entirely up to you. I’ll give you a few ideas to get you started. The key is INTENSITY. For the short-term, virtually ANYTHING is possible. Remember that!

1. Work overtime if your job allows it. Put in as many hours as you possibly can.
2. Get a part-time job. You can make a thousand bucks a month working 80 hours in a month at a part-time job. Think pizza delivery, UPS, painting, lawn care, house cleaning, etc.
3. Start a small business. Some people laugh when I share this idea with them. I don’t say it to be funny. I have a cousin that built up a lawn care business in one summer. It’s been a couple of years since he’s put anything into it, and it still makes him money every month. Imagine what it could be doing if he was actively going after it? If you mow 8 lawns for 8 weekends at $20 a pop you’ll have a nice stash. Don’t forget car washing, window washing, dog walking, etc.
4. Have a garage sale. That’s right – get rid of the junk you don’t need. Sell everything you forgot you had. People sometimes make enough from their garage sale to save some major money toward their #1 fund. Typically you make between $500 and $800.
5. Negotiate your credit card rates down. Threaten to switch to other card providers. This can lower your minimum payment substantially – freeing up the extra right now for your buffer fund.
6. Ask for a raise. Have you been an awesome employee? Do you truly deserve a raise? Then you should ask for one.
7. Cut out your entertainment (keep thinking short-term here). 8. Buy used (refrigerators, washers, dryers, cars, clothes, shoes, etc.)
8. Freeze your credit cards in a very, very, very large container of water. If an emergency does strike where you absolutely need the card, then take the container out and let it melt at room temperature. By the time you can actually get to your cards, you’ll have thought up a good solution for your emergency (that doesn’t involve borrowing money).
9. eBay. Like a garage sale, but with a wider audience. If you don’t know how to eBay, ask the person next to you. They’ll most likely know how and will be able to help you.
10. Car pool. Gas prices are high right now. Sure it might be a bit inconvenient, but imagine if you could cut your gas bill in half!?
11. Brown bag it. Don’t eat out – at all. Remember, a short-term solution for long-lasting rewards. Sacrifice! (You’ll probably trim down a bit too – I know I tend to trim UP if I eat out a lot). You may need to brown bag your dinner as well if you’re working overtime!
12. Cash in vacation. Sacrifice a few vacation days for your peace of mind. Many employers will allow you to ‘cash out’ of vacation. It’s a great way to get some cash.
13. Is your tax refund on its way?
14. Save all windfalls. You do get windfalls. They happen. Stash ‘em.
15. Cut your phone bill. Consider cutting your phone down to the very basics. Do you have a cellphone where you could get out of the contract inexpensively? Remember, it’s a short-term solution for long-lasting peace.
16. Sell your car. Perhaps, you have a car that is way too expensive considering your current income. Sell it! Even if you owe more money on the car than it’s worth, you can refinance the difference (provided your credit is decent), which frees up some extra dollars for your buffer. Remember, once your budgeting foundation is built, that debt will go away quickly.
17. Don’t buy bottled water. Seriously.
18. Don’t go to the mall. Seriously.
19. Cancel cable, satellite, etc. Seriously.

It may take you several months to get to the point where you can live an entire month without touching any income. I’ve worked with some people that were truly so close to living paycheck to paycheck that they worked at it for FOURTEEN months. By and large, they are the exceptions (both in dedication and circumstance) to the rule.

Also, remember again that you can still use the YNAB system without your one month buffer saved. I just expect you to be working toward it – pronto.

The advantages to living one month behind your income are much further reaching than just eliminating the variable income problem of budgeting. When you are not living on the edge you are less stressed, healthier, sleep better, make wiser financial decisions, and enjoy a better relationship with your spouse. Life is better. Keep those benefits in mind as you’re scrimping by without cable, eating brown bag lunches, and throwing everything extra toward your buffer!

Take a moment to write down what you will do beginning NOW to get out of the paycheck to paycheck rut to be able to live on last month’s income. Get crazy if you need to.

Well, I thought Day Two was long, I think this one takes the cake. It’s an important point though, and absolutely vital if you want to have an easy, intuitive, cash flow management system.

Tomorrow we’re going to talk about the ins and outs of a budget – literally. See you then!