YNAB You Need A Budget

[saver22]

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.

Thanks for weighing in. My minimum expenses are about $6300 a month, that's with no Rule 3 funds. But we just got a large tax refund, and we may have a couple more larger sums of money coming in soon. I'm hoping to have at least a buffer the size of our expenses in the bank by the end of June. We'll see!

[MALMomma]

Thanks for weighing in. My minimum expenses are about $6300 a month, that's with no Rule 3 funds. But we just got a large !@#$ refund, and we may have a couple more larger sums of money coming in soon. I'm hoping to have at least a buffer the size of our expenses in the bank by the end of June. We'll see!

And that's fine - I wouldn't worry about the Rule 3 funds yet. Just get that minimum expense buffer up & running. After you do, you can start plugging the difference between your buffer & income into Rule 3 funds (or wherever else it needs to go) and be sitting pretty. Fingers crossed for your June deadline!!!

[saver22]

And that's fine - I wouldn't worry about the Rule 3 funds yet. Just get that minimum expense buffer up & running. After you do, you can start plugging the difference between your buffer & income into Rule 3 funds (or wherever else it needs to go) and be sitting pretty. Fingers crossed for your June deadline!!!

Thanks! I'm really excited to get this going.

[malisab]

If we step back to the very, very basics of personal financial management, what is the most basic, fundamental skill needed? The one skill, without which all other skills and strategies fail?

There's probably more than one answer to this question, but the basic skill I'd like to highlight is letting money sit unspent because it will be needed in the future. This skill is so basic and fundamental that most mass market articles on personal finance assume without discussion that every reader has this skill.

In the real world many people (including some I'm related to by blood or marriage, sigh) lack this skill. They get in trouble because they spend all their money on what looks good to them at the moment, then don't have any money to pay the rent or the car repair bill or the bank overdraft fee. (sigh)

Now, it's very difficult to tell people who lack the skill of "letting money sit" that they need to develop this skill. There is zero cultural support for even considering it a skill. So systems that address the very fundamentals and recovery from truly bad financial positions approach developing this skill in the context of the system being promoted.

Dave Ramsey has a $1000 baby emergency fund. It covers emergencies like car repairs, dental bills, and other stuff that beginners tend to leave out of their budgets. It lets people survive a small visit from Murphy without using a credit card, which would be a big no-no in the DR system. But that's not the most important thing about the DR $1000 baby e-fund. The most important thing about it is, it's a chunk of money that is supposed to sit there unspent. When an emergency pops up and all or part of that fund is used, replenishing the fund is a priority. IOW, less is spent on controllable spending in order to build back that baby e-fund.

That's teaching the skill of letting money sit.

With YNAB, there are lots of places you're supposed to let money sit. The big ones are the Rule 3 funds, so that the car repair or dental bill isn't an emergency. But the very first one that is taught is building the buffer so you can live on last month's income. It doesn't look much like the DR baby e-fund, but it also serves the function of teaching the skill of letting money sit. The idea is that your pay just sits there waiting for the first of next month, at which time it gets budgeted.

For people who have moved beyond the struggle of letting money sit and do this easily, the YNAB buffer is more flexible than the DR baby e-fund. It scales to the individual's income. If you think about it, someone who is having trouble making ends meet on $150,000 per year probably needs a bigger pile of money sitting around waiting for expenses to pop up than someone who is barely making ends meet on $24,000 per year does. It also flexes up and down in repsonse to changes in income, and it isn't designed to just sit there forever like the DR BEF. It sits there till the first of the month, then goes about its business of doing the various budget jobs that are needed.

That't not only teaching the skill of letting money sit; it's teaching the skill of taking time to think before spending. Taking time to think isn't quite as basic a skill as letting money sit, but it's still pretty basic. People who don't have this skill will have great difficulty making their actual expenditures fit their budget.

Once the budgeter is somewhat comfortable with letting money sit and taking time to think about how to spend it, living in compliance with Rule 3 becomes possible (or easier, anyway). And that's where a lot of the stuff that used to be emergencies becomes routine budgeted spending. That's where the decision whether to eat pizza tonight gets made in the context of, "Do I really want this pizza worse than I want to be $20 closer to out of debt, or $20 closer to having a replacement car?" The point isn't that the answer should always be "no;" the point is that a reasoned decision is made and the pizza isn't purchased unless the $20 doesn't endanger any goal more important than eating pizza tonight.

Coming back to the skill of letting money sit, sometimes people who are trying to get out of debt have trouble letting money sit without throwing it at a debt snowball. While throwing money at reducing debt may be more productive than buying pizza when you have a stack of credit card debt, there are limits. Money will still be needed for rent/mortgage, clothing, groceries, and numerous other things that are budgeted. Even when the emotions are screaming, "I need to throw as much as possible at debt reduction," some money needs to just sit there waiting for budgeted expenses to happen. Part of that's the buffer, and part of that's Rule 3 funds for expenses that don't happen every month. YNAB can help you quantify how much money you need to let sit, which lets you know in turn how much money you can throw at debt reduction. If you're trying to both use YNAB and follow DR, I'd recommend you create a category called Baby E-Fund and build the amount remaining up to $1000. In DR speak, that's a BEF. In YNAB terms, that's a Rule 3 fund designated for unforeseen expenses. In either case, it's there to bail you out for budgeting mistakes without sinking your budget entirely.

I know, none of this addresses the original question of how to convince hubby that Rule 1 is more important than DR. That's something you will have to work out as a couple. If you, as a couple, decide to use YNAB without Rule 1 while generally following DR, that's not the end of the world. You might not get everything you could out of YNAB, but you'll be in a much better position than you were before you were trying to budget and track spending. And both you and hubby will be learning and practicing the vital skill of letting money sit.

Patzer

I'm dredging this post up because another post made me think of it. I'm going to link to it on another thread. It's also my big goal for the next school year (letting money sit).

In case it confuses anyone reading this, it was written with the old order of the rules. The order of the rules changed at some point in 2010.

Buffer (stop living paycheck to paycheck) - old rule 1 - new rule 4
Give every dollar a job - old rule 2 - new rule 1
Save for a rainy day - old rule 3 - new rule 2
Roll with the punches - old rule 4 - new rule 3

[ishtar]

I refer to the Letting Money Sit post often.

It's not ingrained in my brain yet, not a habit for me yet, but this post keeps me thinking about it.

So simple, and yet, so difficult.

Ishtar

[jladyga]

Very dredge-worthy.

[malisab]

Very dredge-worthy.

It was your thread that I dredged it up for.

ETA: Here's where I go to find it. There are other great things in there too. The stuff on page 1 is before my time. I go to page 2 and start from there.

frequently-asked-questions-f7/topic1351-15.html

[wizard210]

So let me see if I understand this.

I make 1,702.06 in a month.

I currently have around 16,000 of CC debt(so embarrasing )

Each month I have tried to throw as much at this debt as possible. But if I want to follow the YNAB way I should stop all debt repayment expect for the min due. Instead I should start putting away whatever I can into a savings account(I have an ING savings). Once I have a months income saved(1702.06) I can then start to allocate more money towards my debt repayment. Also I am to let that money in the ING account just sit and not use it unless I have to(murphy comes a calling)

Am I understanding this correctlly?

http://picasaweb.google.com/lh/photo/v5SdBbmx7vXXjOLcvtgF1A?feat=directlink
http://picasaweb.google.com/lh/photo/AyjDcW1cPHmSv8Fw0SmlHQ?feat=directlink

[blarg]

Kind of. YNAB isn't that black and white. People here will have different opinions and I'm sure some would argue that you should have a full buffer before you continue the debt payback.

Personally, if I were in your shoes I'd save up a $500 to $1000 emergency fund while making minimum payments on the debt. This is because when you are paying back debts like this, often times the banks will decrease your credit limit. If you were relying on having that money to tap into for emergencies, this can be a real disaster.

It also teaches you the skill of letting money sit. It will cost you in interest overall to keep this money out of the hands of your creditors, but personally it'd be worth it to me for the security gained by not living on the graces and whims of a bank.

Next step would be paying back the debt. I'd still keep some fun money even if it were a small amount. If something came up that ate into the emergency fund I'd stop debt payback and resume emergency fund building until it's fully funded again.

Most importantly though is that you have to do what works for you. I'm not you, and what's worked very well for me may not be what works best for you.

[jam40jeff]

DISCLAIMER: This post violates every YNAB rule imaginable, takes a lot of discipline, and will likely get me flamed. But here goes anyway.

If you are "daring" and feel you have the discipline to do it, the best "buffer" is a credit card you pay off every month. If you can put most of your expenses on the credit card, you can have zero buffer, yet still not have to make multiple trips to the bank per month. All of your expenses can build up and then be paid at once when the credit card bill is due.

The danger with this method of course is that you can easily overspend and carry a revolving balance. However, if you are using YNAB to make sure you stick to your budget and don't spend more than your income in a given month, this will not happen. Of course, overspending will inevitably happen, so SOME buffer is nice (otherwise you have a small revolving balance until you can compensate for the overspend in later months). But a full month's buffer is not required.

Let me reiterate that this is not a desirable long-term goal, but while you have debts to pay off, it can help you pay them off faster and incur less finance charges on them by using most of the month's salary that would be sitting in your buffer instead to pay off the debt. Thus, I am pretty much agreeing with your husband that Rule #1 is not more important than debt reduction IF (and that's a big IF) you can be disciplined and live with a small buffer and deal with the fact that an overspend may mean a temporary revolving balance on a credit card (which should be fine as ong as the rate isn't much higher than the other debts you are paying off).

What I've found with YNAB is that there really is only one rule that matters in the long run, and that's to spend less than you earn. YNAB is very good and giving you the tools to achieve this goal. If you do that, you will have extra money to put somewhere. Building a buffer IS a good thing, and may USUALLY be the best thing for MOST PEOPLE, but I don't think it's ALWAYS the best thing for EVERYBODY. Some people may be better using that extra money for paying off debts or putting into into a high-yield savings account. Other people may even want a buffer larger than one month. I'm sure Jesse and Co. created the 4 rules to be a good guide for most people, but surely it's not the same for everybody based on different people's situations and how they deal with them. Regardless of which direction you go, it is a good thing to have a buffer in the long run, regardless of whether you decide to build it up now or after your debts are paid off.

As long as you stick to your budget, there's not really a wrong way to go. Good luck!

[xraymd]

DISCLAIMER: This post violates every YNAB rule imaginable, takes a lot of discipline, and will likely get me flamed. But here goes anyway.

If you are "daring" and feel you have the discipline to do it, the best "buffer" is a credit card you pay off every month. If you can put most of your expenses on the credit card, you can have zero buffer, yet still not have to make multiple trips to the bank per month. All of your expenses can build up and then be paid at once when the credit card bill is due.

Greetings, jam40jeff, no flames here - but I feel I must point out something. I am the QUEEN of daring and absolutely have the discipline to use credit cards completely to my advantage. On another board I have been a participant on since 1999, I have gone into excruciating detail about how I saved literally thousands of dollars through judicious use of credit cards. No joke - I put the downpayment to my house on a 0%/$0 fee credit card and paid it off in full by the 12th month, incurring not one penny of interest. THOSE were the days.

And that's what I am about to say here, for those days are essentially over for anyone trying to play this game who is not debt-free. The problem is that the card issuers have become very inflexible and have gotten very swift to slash credit limits to the bone, possibly even BELOW what is owed and causing a huge risk of toppling the house of cards (no pun intended) that this kind of money shuffle entails. I myself would no longer dare to try such a stunt because the climate has changed and the card issuers are not known to show any mercy anymore and the penalty rates are in the nosebleed stratosphere. So what was once reasonable advice for the non-risk-averse may no longer be so attractive to attempt.

That said, if you have had personal success with this method within the past 6-12 months, do tell! The risk is not so much that the determined debtor would backslide, nearly so much as that the card issuers have no compunction about suddenly pulling the rug out from under the debtor. At the time when I was willing to undertake stunning feats of arbitrage, I also had retirement savings I would have been willing to pull from, plus had a disability policy in case I could no longer earn income to support debt retirement. In other words, I was covered. I am even more covered today than I was then, yet I am way less willing to chance it because I feel that the control is in the wrong hands - no longer so likely to be in mine, and I have no trust in the card issuers to have anything other than THEIR best interests in mind (pun definitely intended) at my expense. No longer worth it, I say.

xraymd

[virago317]

What I've found with YNAB is that there really is only one rule that matters in the long run, and that's to spend less than you earn. YNAB is very good and giving you the tools to achieve this goal. If you do that, you will have extra money to put somewhere. Building a buffer IS a good thing, and may USUALLY be the best thing for MOST PEOPLE, but I don't think it's ALWAYS the best thing for EVERYBODY. Some people may be better using that extra money for paying off debts or putting into into a high-yield savings account.

There's no reason why you can't keep your buffer in a high-yield savings account...

[jam40jeff]

What I've found with YNAB is that there really is only one rule that matters in the long run, and that's to spend less than you earn. YNAB is very good and giving you the tools to achieve this goal. If you do that, you will have extra money to put somewhere. Building a buffer IS a good thing, and may USUALLY be the best thing for MOST PEOPLE, but I don't think it's ALWAYS the best thing for EVERYBODY. Some people may be better using that extra money for paying off debts or putting into into a high-yield savings account.

There's no reason why you can't keep your buffer in a high-yield savings account...

True. I guess I was looking for reasons other than paying off debt. I can't really think of any at the moment. However, paying off debt with an APR of 15-20% will save you quite a bit of money over a few years even over putting the buffer into a high-yield savings account.

[jam40jeff]

DISCLAIMER: This post violates every YNAB rule imaginable, takes a lot of discipline, and will likely get me flamed. But here goes anyway.

If you are "daring" and feel you have the discipline to do it, the best "buffer" is a credit card you pay off every month. If you can put most of your expenses on the credit card, you can have zero buffer, yet still not have to make multiple trips to the bank per month. All of your expenses can build up and then be paid at once when the credit card bill is due.

That said, if you have had personal success with this method within the past 6-12 months, do tell! The risk is not so much that the determined debtor would backslide, nearly so much as that the card issuers have no compunction about suddenly pulling the rug out from under the debtor.

I have had success with this method. We are talking about paying the card off each month, so the credit card limit doesn't have to be much more than one month's income. I don't see this being a problem for anybody having decent credit, especially since you will be on time with all payments if you are paying the card off every month. The biggest reason I don't see this as much of a risk is that even if the unlikely happens and the credit card company pulls the rug out from under you, you were only using the card as a buffer, so now you're just back to not having a buffer. You can still pay your monthly bills, you just have to go back to visiting the bank 2 or 3 times a month and budgeting as you receive each paycheck. That is a small risk and a small price to pay even if it does happen for gaining the benefit of using the month's worth of income to pay down high-interest debt over the long run.

I ran some numbers last night on the benefit (it's substantial, basically take a month's worth of income and compound interest on it equal to the rate of the debt you could pay off with it; if the debt takes more than a couple years to pay off, you could be saving quite a bit of money), but I don't have them with me at work. This isn't for everyone and there is some risk involved, but especially if you have decent credit, I believe the risk is very low compared to the substantial reward.

Now what I am NOT advocating is using the credit card to pay a month BEFORE you earn the money. This would not be using the credit card as a buffer, but rather as a part of your required income to pay the bills. That is much riskier, because now if the credit limit is lowered, you are one month behind and truly don't have enough money to pay the bills. That is too risky for me, although there may be people out there who say the reward (which would be double the reward of my method) is worth the higher risk. I don't think it is because in this case the risk has jumped exponentially.

[malisab]

Now what I am NOT advocating is using the credit card to pay a month BEFORE you earn the money. This would not be using the credit card as a buffer, but rather as a part of your required income to pay the bills. That is much riskier, because now if the credit limit is lowered, you are one month behind and truly don't have enough money to pay the bills.

I'm glad you clarified. I took you to be saying that. I was poised to reply.