It seems that confusion over the concept of the buffer comes up quite a bit on the forum. Jesse provides an explanation of rule behind the buffer in the Setup Guide under "Rule One: Stop Living Paycheck to Paycheck". This is a must read, several times if necessary, to get a big picture and an appreciation of the benefits of budgeting per rule #1. As a supplement, I'll also try to put my thoughts down here as to the mechanics of budgeting the buffer and then applying it towards reaching this goal with a simple example.
In my mind rule #1 can be sumarized as living on last month's pay. The practical benefit of budgeting per rule #1 is you enter into each new month with a full month's reserve ready to be put to work. No more waiting on a mid-month check to complete the budget or having to manage your day-to-day cash flow out of your checkbook register to avoid overdraft fees. It also just makes using YNAB so much easier. The concept of zero-based budgeting becomes crystal clear and any deviations in the budget can be recognized and corrected for way before they impact the bottom line.
Getting to rule #1 is done by building a buffer. A buffer is just like any other savings fund: You budget money to it each month and allow the balance to roll forward to the next month, month after month, until it has reached its goal. Once the buffer reaches its goal (a full month's expenses), you turn it into available funds and live off of it for an entire month. During this time your income is deferred, or sits idle waiting to become available funds for the following month's budget. Once the following month begins, you'll be budgeting per rule #1, living on last month's pay. After the buffer month is done the buffer has served its purpose. From that month forward your income continues to be deferred until the following month. That's pretty much it in a nutshell. Sound good?
OK, sounds good. I want to do the buffer thing... how do I do it?
The first thing you need to have is a clear idea in your head is how big your buffer needs to be so you could live off of it for an entire month. Experienced YNAB'ers know this number off the top of their head, but new users might have to take pen to paper and figure out what their total monthly expenses are for their buffer's goal. ING Direct has a nice document called a Spending Record that takes you through the steps to determine this:
https://home.ingdirect.com/privacy/imag ... record.pdf (I hope the link works)
Some people may only record the bare necessities to figure out a just squeak-by buffer goal or record every penny spent for a painless buffer goal, either way just remember that this is how much you are going to have to live off of for an entire month. Also remember that life pretty much returns to normal after the buffer month.
I can think of two varieties of buffer budgeters: The flush new user and the saver. The flush new user is someone who just bought the program and came in with a large enough reserve to be able to fund a full buffer right off the bat to enjoy the full impact of the YNAB method. The saver is someone that has to build the buffer over time. I'm going to show the steps required for the flush new user to hit a home run, but the basic mechanics are the same for the saver - it just takes a few more months to turn out a full buffer.
The flush new user will decide when they will officially begin budgeting with YNAB. I'll use this August as an example. The new user should have a clean customized budget without anything entered into the register to start off the month of August. The first step to actually start budgeting is to enter in the bank account and cash balances as supplemental income into the register. The key to funding a full buffer at the start is the full buffer goal amount needs to be in the account that the monthly expenses flow out of, which is usually the checking account. If money needs to be transfered between savings and checking then it should be done before the beginning balances are entered into the register.
To make funding a full buffer easier to follow and to leave clear record of the initial setup behind in the budget file, I would date these beginning balance entries the day prior to the official start budgeting month, in this example July 31st. This will cause July's available number to equal the beginning balances that were entered in the register. See below how entering the initial balances into the register effects July's Available funds:
The buffer can then be budgeted with the full goal amount. In this example the buffer goal is $3000. Any funds remaining in the July's Available funds can be budged to the Emergency Fund or any other savings category desired to budget July's Available funds down to $0. See below how these budgeting steps effect July's Available funds:
Note that the individual balances roll forward to August (rule #3 in effect). The next month's balances don't actually roll forward until 5 days prior to the start of the month, but you can hover over the cell to see what it will be when it is displayed. To turn the buffer's balance into Available funds for August, simply reverse budget the entire buffer by budgeting a negative number the same size as July's buffer positive balance, thus zeroing out August's buffer balance. See below the result of reverse budgeting the buffer on August's Available funds:
The net result is there is now $3000 (the original buffer goal for this example) available to budget August's expenses with. The real trick is sticking to the bare-bones budget so August's income remains untouched. When September rolls around August's income will be sitting there ready to be put to work.
The buffer process for the saver is exactly the same although it may take several months to build up the buffer until it equals the goal amount. Once that occurs, the buffer gets turned into Available funds just as above. In any case, income during the buffer month and every month thereafter is entered into the register as "Primary Income". This tells YNAB to put it into the next month's Available funds calculation. You can actually see the impact on the next month's available as soon as you enter primary income into the register. The primary income cycle continues month to month. Pretty neat eh?
