YNAB You Need A Budget

[Zombo]

Patzer, that was so eloquently stated, I copied it to a Word document for future "Budget Preaching" sessions with friends.

Wow.

[maryb]

Patzer, that was very well said! Thanks.

[Marcela]

Patzer, thanks a lot for your last post. Up until now I had not really understood the importance of building a buffer before paying off debt. I have to go relocate some money in my budget!

[bookman413]

If I had to argue for prioritizing , I would point out that Rule 1, operating with a months' buffer cash buffer, removes from your life all of the day to day stress of timing income with expenses, so has a greater immediate effect on your stress level and overall day to day and month to month financial life than just having a $1000 Baby Emergency fund does. Also, in most cases, when you are operating fully under Rule #1, then you also have at least $1000 sitting free and clear, in most cases basically fulfilling many of the functions of the Baby Emergency Fund that Dave Ramsey has as his first baby step.

[saver22]

In my case, saving up a full one month's income would cost me $750 a year in interest, since that's money I could have put on my debt. I would like to use a smaller buffer, but YNAB seems to make that difficult. Is there any way to show projected income in YNAB, so I can budget based on that until I'm out of debt? Right now, my buffer is not enough to cover a month's expenses, and as much as it would be nice to live by Rule 1, it would cost me so much that it would defeat the whole purpose of using YNAB in the first place. Am I missing something? Is there a way to configure YNAB for folks with a lot of debt to use a smaller buffer and be able to budget on (buffer + projected income)?

[Mudie]

Is there a way to configure YNAB for folks with a lot of debt to use a smaller buffer and be able to budget on (buffer + projected income)?

Not directly, no.

I'm sure you've heard it before but YNAB, and more to the point, your money, works best when you only budget (make plans) using the cash that you have on hand and not a penny more. The key with the buffer is that it allows you to make solid plans for where your money needs to be placed without any guesswork or stress involved. You have the money, the bills are being paid then you can slam any extra that you have onto the debt which will allow you to get out of debt faster than you thought possible.

Will paying the minimum on your debt to build the buffer delay the paying off of your debt?
Yes, but the wait is worth it. The power of the buffer cannot be overstated, it will provide for you a crystal clear view of what you can and cannot 'afford' to do while keeping you way from the edge of the financial cliff that is too easy to fall off of if you hang out living paycheck to paycheck or only little further on.

Ultimately though it all comes down to what works for you and what you feel comfortable with so whatever you do stick to your budget and that simple step alone will make a huge difference compared to not having any plan at all.

[saver22]

I'm sure you've heard it before but YNAB, and more to the point, your money, works best when you only budget (make plans) using the cash that you have on hand and not a penny more.........Ultimately though it all comes down to what works for you and what you feel comfortable with so whatever you do stick to your budget and that simple step alone will make a huge difference compared to not having any plan at all.

Thanks for the reply, Steve. I guess the question I need to answer then, is this: "Should I pay $1500 ($750/year interest X 2 yrs to be debt free) + 3 more months in debt to use YNAB because 'it will save money and get me out of debt faster,' or should I just reduce my buffer and do my budget on my own?" Your logic appeals to my attraction to the YNAB way, but the math is the pin that's popping my shiny new YNAB balloon. For people in my situation, that's one expensive piece of software.

I'm glad you acknowledged it "all comes down to what works for me." If I could get YNAB to acknowledge that too by being more flexible, I'd be thrilled. But I understand the whole thing is inherently based on only one philosophy. Apparently, this philosophy is simultaneously the strength AND weakness of YNAB.

[Mudie]

I guess the question I need to answer then, is this: "Should I pay $1500 ($750/year interest X 2 yrs to be debt free) + 3 more months in debt to use YNAB because 'it will save money and get me out of debt faster,' or should I just reduce my buffer and do my budget on my own?" Your logic appeals to my attraction to the YNAB way, but the math is the pin that's popping my shiny new YNAB balloon. For people in my situation, that's one expensive piece of software.

Perhaps I'm missing something but I'm not seeing how holding back a single month of money is going to cost you that much lost ground. Not to mention the fact that you could easily house your buffer in a high interest checking account to offset what little savings you would have by staying near paycheck-to-paycheck and having little/no buffer.

I don't know what you are working with for numbers so perhaps that's where I fail, if your income is so large as to make a full buffer in the multiple thousands of dollars then I could see the math working but if it's not then holding back a few (not many) thousand dollars one time shouldn't cost you as much as you say. Please enlighten me if I need hand holding on the math as evidently I do.

As an aside, you wrote "...the math is the pin that's popping my shiny new YNAB balloon.". While I can appreciate what you're saying, Dave Ramsey is fond of 'popping' that notion when he often repeats "If it was about the math, then you wouldn't have gone into debt to begin with!".

[chrish]

I'm a bit confused on the math too. The way I'm reading this is that by NOT getting a buffer first it will take saver22 2 years and $1500 in interest to get debt free. If saving for a buffer first it will cost $1500 + 188 (750/12*3)...the same 2 years (1500) plus an extra 3 months (750/year 750/12-per month 750/12*3-3 months). With those numbers it should cost an extra ~ $188 to get a buffer (in 3 months) before switching to paying off debt over minimums. As muddie mentioned, that number can be reduce slightly by the increase in interest income generated by the buffer.

All these numbers are rough estimates as the interest isn't going to stay same as the principal goes down.

[saver22]

Mudie, here are the numbers I'm working with: One month's income for us is $7500 net. The highest interest rate I'm paying right now is 9.9%, so this is the debt that would be affected, because my $7500 buffer could go to it first. So, 7500 X 0.099 = $742 per year x 2 years = $1484.

So the best solution I could come up with is having a $1000 buffer instead, just to ensure we don't dip into overdraft, which is one of the practices that got us here. What would you do in my shoes?

The idea of the high interest savings account would certainly help, and you've given me something to think about there. Thanks!

@Chrish: I'm having a hard time following your calculations, but hopefully my clarifying my situation in this post will help you see where I'm coming from. I'm eager to hear what you guys (or others) have to say. My own stupidity got me into this mess, and I'm willing to listen to anyone with some financial wisdom right now.

[Patzer]

Edited to add: The sequencing of the Four Rules has changed since this post was originally written. Rule 1, which was the heart of the OP's question, is now Rule 4, Stop Living Paycheck to Paycheck. What I refer to as Rule 3 below is now Rule 2, Save for a Rainy Day. The concepts I originally described are the same; only the Rule Numbers have changed.

Original post follows:

One month's income for us is $7500 net. The highest interest rate I'm paying right now is 9.9%, so this is the debt that would be affected, because my $7500 buffer could go to it first. So, 7500 X 0.099 = $742 per year x 2 years = $1484.

I'm thinking about doing a $1000 buffer instead, just to ensure we don't dip into overdraft, which is one of the practices that got us here. What would you do in my shoes?

This situation reminds me of an explanation of the French versus British army marching speeds during the Napoleonic wars. The explanation I saw was in a work of fiction, so I can't vouch for the historical accuracy; but the underlying concept is important. The author gave the standard length of stride and paces per minute for both the French and British armies, and it worked out that the British standard march was a little faster that the French. But the French consistently outmarched the British. Why? Because the French didn't march faster, they marched *better*. Regardless of whether this is historically true, it is a true analogy to how personal finances work.

I've seen a lot of online analyses of various financial situations that sound like your example of $7500 X 0.099 = $742 per year. The hidden assumption in this type of analysis is that, aside from failure to pay that $7500 on your debt at time zero, nothing else in your financial behavior is different between the two scenarios. That assumption does not usually hold true in the real world.

In the real world, behavioral concerns have a bigger impact on personal finances than analytical concerns. The YNAB methodology is all about managing behaviors. In simplistic terms, the system says don't spend it before you budget it, don't budget it before you have the cash, and defer budgeting income to the next month. That teaches some important, very basic skills that I described as "letting money sit" in a post earlier on this thread.

You're concerned about paying down debt. When I started YNAB, I had no debt, but was concerned about avoiding drawing down my savings when my expenses went up dramatically and my income didn't. What I found was that the methodology helped me change my behaviors, and I was able to accumulate savings rather than just hold even and earn interest.

The same behavioral changes that allowed me to add to my savings in spite of an initially tight budget and multiple visits from Murphy over the past two years can help you find more money than you thought possible to throw at paying down the debt. But first, you need to determine how much money you need to let sit because you will have expenses other than that debt. I know, it can be hard to see a pile of cash earning 1% or less when you have debt at 9.9%. But you do need a pile of cash sitting around waiting for future expenses, and you can't know the precise timing or magnitude of all those future expenses. The buffer is part of that pile. Rule 3 funds for non-monthly and lumpy expenses are part of that pile. Having that pile around is what keeps you from needing an overdraft, and describing it in terms of a buffer and Rule 3 funds lets you quantify how big the pile needs to be.

Then any money you find that you don't need for the buffer or those Rule 3 funds can get thrown at the Debt Service category. This can be very powerful. Once you learn to give every dollar a job, extra dollars tend to be assigned to jobs that are most important to you. That's probably Debt Service in your budget. and it can become a game of taking money from being under budget in Dining or Groceries and throwing it at the debt. But that game doesn't work if you're operating close to the edge with cash flow. It works fine if you have that pile of money (buffer, Rule 3 funds) sitting there and letting you know that yes, you really *can* throw all of that tax refund or bonus or underspending from Fun Money at the Debt Service category.

And that may very well get you out of debt faster than trying to have a minimal buffer and no Rule 3 funds. YNAB doesn't help march you toward being debt free faster; it helps you march you there *better*.

Patzer

[saver22]

Well said, Patzer. You've made some really great points here. Do you know of any others on this forum who have been in my place and found that doing it this way actually got them out of debt sooner?

[Patzer]

Well said, Patzer. You've made some really great points here. Do you know of any others on this forum who have been in my place and found that doing it this way actually got them out of debt sooner?

You might want to check out Terry's success story. And Karen's explanation of why you should follow the YNAB methodology has a note on what happened when she got impatient and threw an extra payment at her debt, without having a buffer in place. (She had previously liquidated the buffer to pay down debt, for reasons much like you articulated.)

I think Steve Mudie (the support guy) might have used YNAB to dig out of debt, too; but that would have been before I got here.

Patzer

[saver22]

Thanks, Patzer. It was great to read those. You really are helpful!

[MALMomma]

I'll also pipe up here, despite you reading my thread that Patzer linked for you.

You say that your net monthly income is $7500. Sure, you COULD use that entire amount as a buffer. But I want to ask one question that I didn't see mentioned. Are your monthly expenses $7500, too? I'm not talking about dining out or buying a new shirt because it was cute. I'm talking your basic NEEDS expenses - mortgage, gas, insurance, food, minimum debt payments, et al. If you sit down and REALLY look at exactly what MUST get paid every month - versus what you would LIKE to get paid every month - are those MUSTS/NEEDS totaling $7500? If they are, then yes, you would need that entire $7500 buffer. But if your NEEDS are sitting at $3500 a month, then THAT is the buffer you should have in place.

Following that, as Patzer stated,

"Then any money you find that you don't need for the buffer or those Rule 3 funds can get thrown at the Debt Service category."

ETA - This topic is making me rethink our original intention of merely saving the $1000 EF while we pay off our debt. With DH getting a promotion next month or May (not sure when it will be finalized), we can afford to save that full buffer first. Just added up our NEEDS and all we truly need is $3625 - only $2625 more than the $1000 EF. With a bonus coming up and a 3 pay month (April), that should easily allow us to build a buffer. And then his raise will allow us to quickly pay off the $15K debt (excluding house & car) by December latest.

Oh, and I'm going to bring up one more reason to have a full buffer in place. It might not happen to you, but something similar COULD happen and lemme tell you - I was SOOOO glad we were prepared!! From my journal:

To quote Charlie Brown:

"AAAAAAAAUUUUUUUUUGGGGGGGGGHHHHHHHHH"

I was going through the register and noticed the balance was more than the bank said we had. Hmmm... Subtracting the bank balance from the register balance, I discovered the amount was equal to our mortgage. Huh? Look at our checking account online and... EEEEEK!!!!!!!!! TWO mortgage payments?!?

Long story short... I forgot to delete the payment I had set up through our bank after I enrolled in the auto pay on CitiMortgage's website.

(Can we all say together "THANK GOODNESS FOR BUFFERS!!!!")

I frantically called Citi and spoke to a rep. Asked if I could have the duplicate payment applied to April. She told me it already had been.

WHEW!!!!! *takes a deep breath*

Should have known CitiMortgage would have been on top of that. They have never failed to impress me since our mortgage was passed to them in March 2006.

Now to go fix both register and budget to account for a double mortgage payment this month...


(One more time, folks. Can we all say together "THANK GOODNESS FOR BUFFERS!!!!")