YNAB You Need A Budget

[mozzie61]

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.

Maybe I'm just a bit slow at the moment or still tired from night shift, but I've read this post several times and I don't really get how a credit card you pay off each month is a buffer. Isn't the buffer effectively last month's income which is then used to set the budget for this month? The posts I have read (especially Patzer's explanation) show how the buffer is a tool to improve your cash flow and even out the bumps of an uneven income stream thereby allowing you to get off the pay day to pay day cycle. A credit card limit is available funds, but I don't see how it is a buffer substitute as it does not change your cash flow. To me it seems more like a Rule 2 "rainy day" fund.

I also don't see how not having a buffer entails multiple trips to the bank each month. Without a buffer I simply budget all the dollars we have available each pay day, and we then spend those as the expense comes up. This rarely involves a trip to the bank with most transactions being cash or debit card. Of course there is the ATM/EFTPOS withdrawals to supplement the cash account, but I don't envisage any more or less ATM trips when we have a full buffer and start living on last month's income. Our budget spending will not change, but the cash flow to fund it does.

Personally I wouldn't go down the credit card monthly pay off track, but that's because we already have too many of them with outstanding balances. Some of this debt burden probably occurred because we thought we would pay them off each month and we never did. That's a reflection of our lack of financial discipline until the recent nadir that resulted in finding YNAB, but it's also a reality for many people coming to YNAB. YNAB is the tool we are using to put some financial discipline in our life, but the biggest thing in starting to turn our debt position around was to stop using credit cards. Just using Rules 1 to 3 (Rule 1 has become Rule 4 during the life of this post) has dramatically improved our bottom line and while the funds we have saved as an Emergency Fund and a partial buffer could be used to pay off debt faster the peace of mind we have from knowing those funds are sitting in reserve and that they are all our dollars is priceless. Having a credit card that we pay off each month wouldn't give the same level of satisfaction, and we're prepared to "wear the cost" of having funds in reserve while still having a mountain of debt. Having said that I can see once we are debt free how the use of a credit card could assist our monthly cash flow, but I still don't see how it as a substitute for the buffer. Perhaps our understanding of the buffer is just different.

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.

The "stick to your budget" statement implies that the only problems you will face in life are the ones you have control over. Of course this is not often the case and one of my favourite quotes is "life is what happens to you while you're busy planning something else". While the financial discipline that a budget imposes is important in bringing spending habits under control I think one of the key reasons the YNAB methodology works for many when other budgeting efforts have failed is that it breaks away from the conventional "set and forget" budget that you then try to live within (usually with limited success because of the aforementioned "life happens" quote).

YNAB recognises life is not a smooth highway and this is implicit in Rules 2 and 3 that ask you to plan ahead for those rainy day expenses, while allowing you to cut yourself a bit of slack if your spending doesn't quite live up to expectations (whether that's self induced or a Murphy visit). I've found this a refreshingly different and workable approach to the often perceived rigidity and paucity that "sticking to a budget" implies. While "sticking to our YNAB budget" we have paid all our regular expenses, coped with a few minor Murphy visits, made some real progress in paying off our debt, saved some emergency and other rainy day funds, built a partial buffer, had some fun and found financial peace where previously there was despair.

Of course I recognise YNAB means different things to others and the rules can be seen as a "guide only", but I highly recommend to anyone starting YNAB with existing debt to continue paying off that debt as best you can, get intense with Rules 1 and 2, and apply judicious use of Rule 3 (I prefer whack-a-mole to avoid overspends). The value of Rule 4 (the old Rule 1 that started this post) relative to your debt burden will then become clearer and your decision to pay off more debt or build your buffer will be an easier one.

[jam40jeff]

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.

Maybe I'm just a bit slow at the moment or still tired from night shift, but I've read this post several times and I don't really get how a credit card you pay off each month is a buffer. Isn't the buffer effectively last month's income which is then used to set the budget for this month? The posts I have read (especially Patzer's explanation) show how the buffer is a tool to improve your cash flow and even out the bumps of an uneven income stream thereby allowing you to get off the pay day to pay day cycle. A credit card limit is available funds, but I don't see how it is a buffer substitute as it does not change your cash flow. To me it seems more like a Rule 2 "rainy day" fund.

Rule 2 and Rule 4 are very similar IMO. They both advocate having emergency funds available for an overspend. One rule tells you to allocate them to a specific category, another rule makes them available to cover any overspend. In effect, they work out the same, especially if you're doing whack-a-mole.

The Buffer isn't a rule as much as two of the rules require the Buffer to be present. I am looking at the Buffer more in the sense of Rule 3, where it covers overspends. I am saying that a credit card can cover these overspends similarly to how the buffer would. If you have a Buffer, overspend, and your Buffer is lowered, your goal is to build it back up. If you do not have any Buffer at all (which is also not what I advocated, I stated that a Buffer much smaller than your monthly income should be sufficient), your overspends would become a revolving credit card balance, and your goal would be to pay off the balance in future months (get the "buffer" back). If you have the small Buffer I recommend (at least while paying off high-interest debt), only overspends in excess of your Buffer amount become revolving credit. Yes, this can happen in the case of a rainy day (or thunderstorm as it may be). However, this shouldn't be a monthly occurrence. Even if it happens a couple times a year, what's the worst case scenario? You end up with some revolving credit until you pay it off (which is analogous to "build back up your Buffer"). However, in all the months you haven't had the revolving balance, you have been paying off credit card debt. So to me, having a Buffer instead of using that money to pay off credit card debt is simply ensuring you have a month's worth of "extra" credit card debt (the money you could have paid down the credit card debt by if it wasn't sitting in an account being your Buffer) in order to prevent the possibility of having some credit card debt. It makes no sense to me.

To me, the Golden Rule of YNAB (and budgeting in general) is Rule 1. The other rules help you build a safety net and prevent you from incurring debt. However, that is much more important once you are debt-free. Avoiding new debt (which should only be the occasional rainy day) by keeping old debt around longer can never be a better outcome than the alternative.

The only advantage I see is that new debt can be disheartening and cause someone to give up on YNAB and their budget. Sure, if this is the case and it makes you more comfortable to have the budget even if the math doesn't make sense, then go for it. That's why I say this is my opinion and it works for me, and if others see it and agree maybe they can make it work for them. But I don't expect it to work for everyone. But for me, as long as I stick to Rule 1 I know I will be getting the best possible outcome with what I have to work with, and will worry about the other rules once my high-interest debt is paid off.

[xraymd]

Greetings, jam40jeff, thanks for clarifying. I see that you are having success with your method of reducing your buffer to pay ahead on the cards and whatever works is clearly the thing to do! But I have to reiterate that even if you are not a month behind already when you have to pull out the cards to pay for a Murphy visit, you run the now very real risk that the credit card companies could topple your plan by taking unilateral action against your credit limit or by changing the terms against you. That's the biggest issue I see - that is the part of the risk that is not under your control, and that is what makes your strategy a potentially high-risk one (though, yes, it is a high-reward one if everything goes the way you have intended it to).

For me, my pathway out of debt came from two rules I imposed: 1) Do not ever add a cent to credit that already had an interest rate attached and 2) work, work, work to both find additional dollars to throw at the debt while simultaneously striving to reduce the interest rates on debt already owed.

So for me, the cards were a lockdown. No new money was ever put onto them, once they carried a balance. When I was undertaking my maneuvers that I'd described above, it was with NEW credit at highly favorable terms and under the circumstances where I actually had the funds to pay it off (from retirement savings) if the creditors were to pull any fast ones. Payoff that way would have definitely hurt, but would not have killed me, where carrying a balance that could escalate to high rates just because the creditors could raise them would DEFINITELY have dealt me a deathblow.

I know you are not advocating putting that much of your money at that much risk, but the risks of outweighing the benefits are considerable. It's great when it works (it worked for you and it worked for me) but I do sound the note of caution because the wildcard in all of this is what will the creditors do and that is the single biggest uncontrollable.

xraymd

[jam40jeff]

xraymd,

I understand what you're saying. I suppose the amount of risk is different for each person and each person must evaluate that. My point is simply to discuss the flip-side of the Buffer rule (if one doesn't understand both sides, one can't really make an educated decision on which path to take). I definitely don't advocate blindly following the path I have chosen for paying down debt and think for many people the rules are the best way to go. However, I just wanted to provide anecdotal evidence of why someone may doubt that Rule 4 (previous Rule 1) may be more important than DR in their case (as was the thought process of the husband of the OP).

[TheGooch]

xraymd,

I understand what you're saying. I suppose the amount of risk is different for each person and each person must evaluate that. My point is simply to discuss the flip-side of the Buffer rule (if one doesn't understand both sides, one can't really make an educated decision on which path to take). I definitely don't advocate blindly following the path I have chosen for paying down debt and think for many people the rules are the best way to go. However, I just wanted to provide anecdotal evidence of why someone may doubt that Rule 4 (previous Rule 1) may be more important than DR in their case (as was the thought process of the husband of the OP).

Say you have an emergency , and it exceeds or maybe you don't have an emergency fund. The payee only accepts cash or check, no credits are accepted.

Scenario #1 You need to pull money from your buffer but you can't as its stuck in the credit card account. You try to use a cash advance, which would work but the cash advance limit is lower than the amount you need to pay off the emergency. Basically, you are SOL in this situation.

Now, move your buffer to a checking account and let's replay this scenario.
Scenario #2 You write a check to the payee, shed a tear that you have a rebuild your buffer, and go on with life.

Now, I would rather have scenario 2 apply to me, as my checking account will let me pay in the form of cash, check , cashier's check, money order, and credit ( visa check card ), while a credit card only works where they are accepted.


PS this actually happened to me, and I was so glad that I had the money readily available in whatever form it needed to be in.

[bookman413]

A Buffer, to me, is essentially a cash-management expedient. What I mean by that is that it allows you to avoid having to worry about your bank balance for a given period of time, as long as you are spending within your budget. The buffer is an amount of cash sitting in your checking account that absorbs any expenses without you having to deposit money. I do NOT consider the buffer to be emergency funds in any sense,although if you have a buffer held in cash it is certainly possible to take that cash away from the expense Buffer and re-appropriate it for Emergency spending if necessary.

Since an expense buffer, viewed this way, is simply a cash-management expedient that allows you to chill out for a while about monitoring and sustaining your checking account balance, one could easily say that a credit card CAN fulfill the cash-management function of the buffer very nicely, because a credit card takes those monthly expenses and buffers them from OUTSIDE your checking account, only requiring you to pay them when the bill comes due. I would not, however, call that the "best"expense buffering method. It's just a buffering method that works.

However, it is a little different to say that you have a credit card that can carry your months' expenses vs having $2500 in cash already in your account ready to cover your month's expenses. Having the $2500 in cash is definitely more secure.

However, both work and fulfill the cash-management expedient function of the Buffer. I prefer to have the $2500 in cash to relying on the credit card, although I do in fact put many of my monthly expenses on a credit card. I just don't consider the credit card to be my formal buffering method or Buffer-I consider the cash to be my buffer.

After I paid off my consumer debt I added an emergency fund to my budget as well. This is different in my mind than the buffer because it is intended to defray completely unexpected expenses. (car repairs, tickets, and medical copays don't count--I already have funds put aside for them. This emergency would have to be something completely unforeseen, something not budgeted for--for example, moths eat all of my clothes and a troop of raccoons steals all the food out of my pantry).

Like Patzer, beyond this I have a fund to replace my current income for a time should I lose it or decide to forgo it for a time. I call it the Income Replacement Fund.

This is very much modeled on Patzer's method of tiered buffer and emergency funds.

That being said, I think while you are paying off a lot of debt the distinction between a buffer and an emergency fund or emergency funds for different situationsmight not be so important to make. But once you have debt paid off and your savings start to accumulate it is good to have a clear sense what these funds are for so you can size them properly.

I have to say that having got to this point in my budgeting, I have moved past having to be concerned about the budgeting as I do it pretty much by habit and matter of course. Not updating my budget for more than a week would feel weird, but I don't think about it on a daily basis. I have my budget totals with me on my person when I shop so I can refer to them, but that's about it. If I've spent money and not recorded it in my notebook immediately (yes, a physical pad of paper) then I probably will do that within an hour, or at the minimum before I go to bed for the night, because not doing it would feel like not brushing my teeth. If I haven't updated my budget totals in about a week, I begin to be reluctant to spend money because I don't 't have accurate budget figures to determine what I could afford and I'm unwilling to put myself in the position of going over budget unmindfully. So in that case I take 20 minutes, sit down and do an update. That things have gotten to a very easy maintenance point actually frees up mental space for other priorities in my life, which is both nice and is requiring some getting used to. I feel like there is some mental void and a voice inside my head that sometimes says--"what's the matter, why aren't you obsessing about your money and budget". I'm not really used to it yet.

[txoz]

This is my first time to post anything to a forum but I felt compelled to share my story and, perhaps, help in understanding the "credit card as a buffer" discussion. 5 years ago, I found myself divorced (thank you Lord) with $46,000 of CC debt in my name, slowly going to collection (the rate of slowness is a discussion for other forums, it's amazing how long they can charge you 19.9% interest even after you cannot pay). I make a good income ($5,000 net) but am paying over $1000 in child support. Obviously my first order of business was my debt. I tried using YNAB for a time but Rule #1 had me stumped...there was no money left to even try to build a buffer. I understood the benefits but could not spare a penny; and, using the old YNAB software, with the buffer so ingrained in it, was difficult and depressing. So, realizing my need for a budget, ANY budget, I made a spreadsheet and applied, what I thought, was the most important rule, "give every dollar a job"....in this, YNAB was a HUGE savior...it taught me how to let money sit (I used an envelope system) and how to budget for those yearly/quarterly/unexpected expenses. Every dollar I make has a job and I cannot stress the importance of that, in my life, strongly enough. I visited the forums often, reading folks stories, getting inspiration when I desperately needed it.

So, on to the whole credit card thing....in the past few years, I have paid off $39,000 in CC debt and only have about $7,000 to go, I have purchased a house, and now have a vehicle that I do not worry whether it will start in the morning. I had been getting the emails about a "new" YNAB, one that enabled use without a buffer, so a few months ago I downloaded it and decided to give it another shot. It is easier to use without a buffer but still, I like to budget for the month but I get paid twice a month....this left alot of "red" numbers if you know what I mean In order to help build my credit score (which had sunk to the low 400's), I have been using my American Express card...don't panic!....I pay it off every month and just use it for budgeted items, no wild spending going on here Anyway, I experimented with different things in YNAB, trying to get rid of "the red" and I stumbled onto a solution that works for me. I have my American Express card, since it is paid off every month, set up as a "Savings Acct" (so it is part of my budget) and I "pre-load" it with the amounts in my budget that I will use it for, like gas, groceries, medical bills (I had back surgery this year), and house projects (with a credit score like mine was, it's a very needy house). So, to put numbers to all this, I have been able to "not spend" $1000 so far, so that is my current "buffer". At the beginning of the month, I add my first payroll check of the month to the checking acct ledger and add what I have budgeted for gas, groceries, medical, and projects to my american express savings acct ledger (this is currently $1000). All this adds up to having $4,500 available to budget at the beginning of the month. This, for me, does not take care of all of "the red" since every dollar has a job and I employ them all at the beginning of the month but, luckily, I have 2 bills due at the end of the month that total $500 so I just have to have that in the back of my mind as I stare at the red.....until the 15th, when I can add my 2nd payroll check. And don't forget that you need to subtract the $1000 "buffer money" (0 out) your AmEx savings at the end of the month.

Anyway, I hope this makes sense, if I could use the AmEx to pay other bills it would work a little better for me and yes, it would be better if I had at least a 1/2 month buffer...and I am working on that....

I would like to add a note....I still use my spreadsheet as well because I have debt that is going away and my spreadsheet has a "projected income" cell that enables me to budget well into the future and see where I have "unemployed" money coming up that I can plan for...like I have a collection bill that will be paid off in Jan...in my spreadsheet, I have moved some of that monthly money to my 401K and some of it to a medical bill (in Feb).....in my spreadsheet I can see all this but in YNAB, I have not discovered a way to "project out" and plan ahead very far while still being able to look at my numbers and tell what I Really have to spend.

I would like to thank everybody at YNAB and all the forum users for enabling me to get a handle on my finances and leave the worry (mostly) behind.

[bookman413]

I have my American Express card, since it is paid off every month, set up as a "Savings Acct" (so it is part of my budget) and I "pre-load" it with the amounts in my budget that I will use it for, like gas, groceries, medical bills (I had back surgery this year), and house projects (with a credit score like mine was, it's a very needy house). So, to put numbers to all this, I have been able to "not spend" $1000 so far, so that is my current "buffer".

This is a perfect method. great job and creativity in adapting the buffer concept to your needs.

[stephaniesherie]

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

Oh my gosh! This is my issue, right to the heart, direct to the core! THANK YOU!!!

I'm so glad I found this site/system because it accurately addresses my root behavioral issue with budgeting. What goes is a $1,000 fund if I'm living month to month? I strongly dislike the DR system on many levels.

[jessiebird]

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


Oh my gosh! This is my issue, right to the heart, direct to the core! THANK YOU!!!

This is something that has really been taking hold on me in recent months (been on YNAB since August, I think). I got wind of Dave Ramsey a couple of years ago, and I was all over it, briefly. My husband was willing to go the distance and we paid off a $1,300 in a couple of months. It was great. However, we had little to fall back on, and when an emergency came up, that credit card got loaded right back up again, this time to $2,200.

When I first got on YNAB, I really just wanted to pay off all the debt. It is one of the points, for sure, and our debt is holding us back financially, in that we pay out so much every month just to keep on top of it. However, before I could get to the snowball, I had to really think long and hard about where our money is going to need to be budgeted in the next months and year. Even though I want to throw hundreds extra a month at debt, first I have to be realistic about our upcoming financial needs because in truth, the biggest stress we've had over the past two or three years is never being prepared for emergencies (or, to be honest, annual or semiannual known expenses).

I do have to credit Dave Ramsey for getting me to realize that just because Americans tend to have a lot of debt, that is not a healthy situation. But I also realize that I'm not willing to put every spare dollar toward debt right now because what is ultimately more important to me at this moment is being able to be prepared for whatever comes up financially. I'm still in the preparation stage but things are getting better rapidly and in a few months I will be tackling the debt with a vengeance, knowing that I can without risking all our current financial security to do so.

[stephaniesherie]

I think letting food and money sit is my purpose for this life.

Leaving $50.00 sitting in the bank to save/add to the buffer, etc. *feels* the same as eating only what I'm hungry for on my plate, not overeating and walking away from the rest of it to "let it sit."

[blackdiamond]

The biggest reason for a buffer is that if you spend every penny each month eliminating your existing you leave no flexibility to handle abnornmal expenses (ironically that normally come up) which will force you to go right back to spending on credit and digging your hole deeper.

Part of the success that Dave Ramsey teaches comes from paying off the smaller debts because it feels good and also eliminates a required payment. Even if the payment was small, not having to pay it provides a little more financial freedom to put the money towards another job. If you started by trying to pay off a huge loan, like a home mortgage, you would never pay it off and you would be unlikely to pay off the debt that is costing you $50 to $100 per month and having another $100 in your montly budget can make a huge difference.

Hopefully, your hubby will understand this concept. If you put everything toward existing debt you're setting yourself up to not be able to handle unplanned expenses in the short term.