YNAB You Need A Budget

[JEF]

I bought YNAB a little less than a month ago after I got myself out of credit card debt and then back in. YNAB was highly recommended and so I bought and downloaded it. At that time, my thoughts were "yes, I want to live in Bufferland" but now I'm not so sure. OK, I’ve read all the buffer threads I could find and right now I know you're all saying I'm mad, a buffer is essential, you have to have a buffer, etc. So I'll try to explain. (BTW, I'm from Australia and while Aussies and Americans might all speak English, they're not quite the same languages so I'll try to do my best). Also, this is kind of rambling because I've tried to explain my thoughts/reasons so I've bolded the main paragraph questions.

Some background .. about May last year my car registration was due. It was a big bill and not one that can be "levelled" throughout the year or paid in monthly instalments but it was expected. My credit cards were maxed and I was paying bits (barely even the minimum) off them each month so I could pay parts of bills (only once they'd turned red, mind you) but nothing like being able to afford the car reg. So I didn't pay it and instead looked at refinancing my mortgage and credit cards. I then got a completely unexpected bill (one which I thought was already paid) of $3,000. Took a while to refinance and unfortunately, my car registration was by this time more than 3 months overdue and was cancelled. I had to go to the additional expense of getting a roadworthy certificate, new registration plates - all about double the cost of the original registration. The point of this story is that I've become financially scarred (not in terms of a credit rating, just in my own thinking). My first thought then was that as I get paid fortnightly (every 2 weeks) budget fortnightly (although the term "budget" was used loosely - really a euphemism for "spend"). Just before Christmas I decided to start a separate account into which I can put money each month to pay bills so I don't end up with a car registration bill (or similar) in another 10 months that I can't pay.

So I’m at YNAB. I have a transaction account (chequing account), a bills account, a savings account (from a sort of windfall and it's not very big) and two credit card accounts (now no frills, low interest accounts but still with debit balances that I want to pay off). At the moment my transaction account has my pay paid into it and is used to pay bills and withdraw cash (my bills account does not yet have enough in it to pay all my bills but does pay some) and my credit cards are supplementing my income but obviously that just means my debt's increasing again.

My question is what is the purpose of the buffer? Is my bills account (when I build it up) my buffer? My idea of my bills account is that it's there to cover all bills - expected and unexpected - so I don't get caught short and stressed (and in a worst case, have my car reg cancelled again!). My bills account is a medium interest internet only account but I’m not bothered about the interest earned – that’s not really the point. I keep money in it to earn interest but it’s not a savings account. I transfer funds from it to my transaction account to pay bills – it just earns a little interest in the meantime. Anyway, if my understanding is right, it doesn’t really matter what type of account my buffer is kept in? But I have it categorised as "available this month".

But I'm not sure why I should be living with a buffer rather than from pay to pay if I can instead build an account to pay bills. My understanding of the buffer is that the money isn't available to be used until next month. I can use my bills account as a buffer but I’m confused because my understanding is that I'm not supposed to use the buffer for these unexpected or overly large bills. Or maybe it’s that a real buffer is a long term plan so that I can factor into my budget over 12 months or so these larger bills. A month’s worth of expenses (buffer) though can’t factor in the larger yearly bills at this early point. Or is the point that I do use the buffer for these types of bills and then "restock" the buffer? At least until I can get a bit more than a month’s worth of expenses in my buffer. Or is it until I get to the point that my budget is a little freer that I can balance – and budget – over 12 months for these larger bills?

I hope this is understandable. I really want to understand this because I'm hoping to take advantage of the fact that February is a short month and my last pay was today so I only have a few days left of January to hopefully not spend anything of today's pay. If that's the case, I have made a budget for February which will see me use today's pay and the pay I receive in the middle of Feb for the whole of Feb. (I will live frugally but it will be worth it in the end). I can then use the whole of my late Feb pay to put into my bills account (or buffer) and then use March's pays for March until I can build the buffer. I just really need to understand why a buffer is so important. I think it’s in April that I get an “extra” fortnight’s pay which would then pretty much complete a month’s buffer (or be just a little shy).

Thanks in advance for any help. I'm also looking at trying to attend one of Erin's seminars but the time difference makes it difficult (though not impossible). None of the current dates/times match days/times that I can attend but I know there have been some in the past that were possible so I'll keep checking. Looking forward to attending one.

Jayne
PS: Thanks for reading and helping - I find the forums invaluable

[Patzer]

My question is what is the purpose of the buffer?

The purpose of the buffer is to allow you to budget a month at a time instead of a paycheck at a time. Note that "budget" is not the same as "spend." Budgeting is assigning all of your dollars to categories. Many people on the forum speak as if the buffer means getting a month ahead on spending; but that's not the real point. Someone who gets paid once a month, on the last day of the month, can be living paycheck to paycheck and still have the benefit of being able to budget for February based on January's income. That person is buffered in the sense of being able to do the budget once a month.

I'm not sure why I should be living with a buffer rather than from pay to pay if I can instead build an account to pay bills.

Your account to pay bills is serving much of the same function as the Rule 3 rainy day funds; it's ensuring that you will have the money for the car registration when you need to pay it. In the YNAB methodology, you would set up a category like Auto:Registration and budget money to it every month. If you calculate the numbers correctly, dutifully budget to that category every month, and refrain from using that category for anything else, you have the money in the Auto:Registration category to pay for the registration when it's due. From a budgeting perspective, it doesn't matter whether the money is kept in your transaction account or your savings account. (Okay, it matters when you go to pay the bill; you may need to transfer money from savings to checking in order to actually cover the bill when it comes due.)

I really want to understand this because I'm hoping to take advantage of the fact that February is a short month and my last pay was today so I only have a few days left of January to hopefully not spend anything of today's pay. If that's the case, I have made a budget for February which will see me use today's pay and the pay I receive in the middle of Feb for the whole of Feb. (I will live frugally but it will be worth it in the end). I can then use the whole of my late Feb pay to put into my bills account (or buffer) and then use March's pays for March until I can build the buffer. I just really need to understand why a buffer is so important. I think it’s in April that I get an “extra” fortnight’s pay which would then pretty much complete a month’s buffer (or be just a little shy).

Let me step back a bit and talk about the theory of budgeting. I'll get back to the buffer.

There are three basic types of expenses that most people need to manage in their budgets: Monthly spending, non-monthly regular expense, and lumpy expense.

Most people think of monthly spending when they start a budget. This would be things like groceries, dining out, gasoline (I think you'd say "petrol"), rent or mortgage payments, and monthly utilities. Some of these things are very predictable (rent) and some are controllable (groceries), but the common theme is that these are expense that need to be paid every month.

Non-monthly regular expenses are things that don't happen every month, but are reasonably predictable. This would be things like your car registration, auto insurance that is paid every six months, utilities that are paid every three months, property tax that is paid annually, and so on. You know when these things need to be paid. You may not know the exact amount that you'll need to pay, but you usually have a reasonably close estimate. The classic budget solution for non-monthly regular expenses is to budget a flat amount per month. What many mass media articles on budgeting fail to explain is that budgeting $50 per month for a $300 car insurance bill that needs to be paid every six months implies that you need to put $50 per month aside somewhere every month and *not spend it* so that you will have that $300 after six months to cover the bill. You've done this with your bills account. The YNAB methodology would have you do this by building up Rule 3 funds. It's the same concept.

Lumpy expenses are things that may not happen every month, or may be small in some months and big in other months. This would be things like car repairs, medical expenses, home maintenance, and so on. You know you will have these expenses, but you don't know with certainty either how big they will be or when they will occur. The YNAB solution to lumpy expenses is to treat them much like non-monthly regular expenses--budget money to them every month to build up Rule 3 funds, so you can cover the expense when it arises. It's trickier, because you don't know for sure how much money you're trying to build up or when your deadline is. I put target numbers on the size of some of these categories, notably the Unexpected Expenses category. If Unexpected Expenses is sitting in my budget at its target amount of $2,000, it doesn't get any new budget dollars. If I need to use the Unexpected Expenses category to cover a Murphy visit, building it back up to $2,000 becomes a budget priority.

Now, back to the buffer. If your budget is dominated by monthly spending categories, the buffer is vital. It gives you breathing room for cash flow, so you don't go hungry for 2 days in the middle of the month waiting for the next paycheck. If your budget is dominated by non-monthly regular expenses and lumpy expenses, the buffer is less important. It will still give you the luxury of only having to budget your income once a month; but those big non-monthly and lumpy categories will have enough Rule 3 funds sitting in them at any given time that cash flow shouldn't be a problem.

The more your budget is dominated by the last two types of expenses, the more it looks like an escrow analysis: I have $X sitting here for property taxes that are due in February and September, $Y sitting here for homeowners' insurance that is due in December, $Z sitting here in the Unexpected Expenses category waiting for Murphy to knock on my door, and so on. The more your budget looks like an escrow analysis, the less difference it makes whether you are budgeting this month's income or last month's income. The money is going to be sitting there a while in either case.

Patzer

[xraymd]

If Unexpected Expenses is sitting in my budget at its target amount of $2,000, it doesn't get any new budget dollars. If I need to use the Unexpected Expenses category to cover a Murphy visit, building it back up to $2,000 becomes a budget priority.

Greetings, Patzer, this bears repeating: the need to create room in the budget to target dollars for the job of rebuilding the Unexpected Expenses category back up. It is not directly related to the care and feeding of a buffer but it is important to understand that maintaining the Unexpected Expenses category is a dynamic process. The buffer seems like it's almost a "once and done" since it is a hurdle that once reached becomes self-perpetuating: once a month's worth of earnings has been saved in advance, then this month's pay goes always to covering next month's budget.

But the Unexpected Expenses category can become a "gotcha." Money taken out from it needs to be put back into it by spending less elsewhere and allocating dollars to it again, whether by Rule 4 within one month, or over time. It takes extra awareness (and willingness) to make this reallocation happen so that the next time Murphy comes to visit, he won't have caught you with your pants down due to a skinny figure in the Unexpected Expenses category.

That's sort of the advanced beginner level of budgeting. It's great to get the jobs assigned to your dollars and watch them behave the way you'd planned. But what's the disaster recovery back-up plan for emergency dollar job reassignment if the tsunami hits the Unexpected Expenses category? Every budgeter needs to develop his/her own Red Cross mode for when dollars need to be temporarily redeployed. That's the icing on the cake of bedrock day-in, day-out financial security.

xraymd

[Trakeveth]

I am brand new to YNAB, so this is my thinking based on my very limited experience with the program. I think you answered your own question in the very first sentence of your post...

I got myself out of credit card debt and then back in.

You need a buffer so that you can get out of credit card debt and stay out of it permanently.

I also have credit card debt to pay off, which is new for me since I ALWAYS used to pay my credit card bill in full every month and only used it because it gave me cash back on purchases. Some lifestyle changes took place over the past 18 months and now I have debt to pay off because I didn't monitor/tweak my budget well enough when those changes came about.

My gut instinct was to focus on paying off that debt first, at the expense of everything else. The reality of the situation is that life goes on and we need money for bills and expenses that cannot be put off so paying off the debt is going to have to be a long-term goal.

It has only taken me a matter of days using YNAB to realize the powerful feeling that I will having knowing that all of my expenses are budgeted for and I will never again have to regret the amount of money I sent off to that credit card trying to pay down that debt and now some unexpected expense has popped up and I am in trouble because I have no money left to pay for it. So guess where it went....right back onto the credit card! It can really perpetuate the debt cycle living that way.

I can say with certainty that once I have reached my buffer and am living on Rule 1, my financial stress level will be reduced....maybe I can even stop having numbers swirling around inside my head all day, every day!

[JEF]

Thanks everyone for your help. I've been slack in not saying that sooner but I thought I was doing OK on my own given that I had money left over in each fortnight's pay. Unfortunately, I spent that money unwisely, partly to repay credit card debt (that was sort of wise) but mostly on books and DVDs. So I'm back and hopefully following your wisdom

I've realised that a buffer is a good thing. It'd be handy to, if absolutely necessary, have money in the buffer to use if there're no other funds available for lumpy expenses (although I'm trying to budget for those) and knowing that I then don't have to panic about not being able to eat but just having to then replenish the buffer. So here's what I'm doing:

• Given that I get paid fortnightly, I'm trying to break down my saving for a buffer into realistically achievable goals. First, I'm saving what I'm calling a "mini buffer" which is one fortnight's pay. That will then allow me to budget funds I have as a monthly budget. At the moment, I'm classifying one fortnight's pay as "available income" and one fortnight's pay of "expected income" as "available income" for the month. Unfortunately, that means budgeting money for the month that I don't yet have. I need to have that money so my "mini buffer" is priority number 1.
• Next, I'll save another "mini buffer" meaning I'll have an extra fortnight's pay as "available next month".
• Then I'll save my remaining fortnight's pay and have a complete buffer. When I say a complete buffer, I want to try to live a month off two fortnight's pay and have two full pays per year to add to my rainy day fund and/or replenish any deficiencies in my buffer (although my goal is to replenish small buffer deficiencies as I go along - is that right?). I'm never going to have two full pays a year to go towards replenishment because my mortgage payments are payable fortnightly rather than monthly but, hey, the remainder of those fortnight's pays are enough for replenishment I'm sure!

So I've set up a direct debit from my account into which my pay goes to credit an amount to my savings account each pay and, although I'm not yet willing to use all my savings towards my buffer, I'll use what I've had credited for the past couple of months towards my first "mini buffer". I anticipate having that by mid October at the latest (and have diarised it to make sure). Then I'll start again. Once I've got the second, I'll be on the home straight for my third "mini buffer". I'd like to be able to say that the third will be my last but I know it won't and I'm trying to be realistic. It's almost inevitable that by that time I will have had to use some of those funds for lumpy purchases because I won't in that time have been able to allocate enough in my budget for those things but that's OK. I'll roll with the punches and make it up.

Thanks again everyone for your help.
JEF

[bookman413]

There is no need to have a buffer. In essence, a buffer is just money you have built up that designated to be spent on next month's or next week's expenses (depending on how big the buffer is). You don't need one, but if you don't have even that then that's an indicator that you have next to no money to your name. If your goal is to save money and improve your financial position, you will in effect be developing a buffer.

YNAB's specific use of the buffer happens to be very handy and relieves a lot of the stress of day to day finances, so I think it's a good thing to build one up and use it as intended--a chunk of cash that you are building up now, or have already built up, to fund expenses a week, two weeks, a month, or two months out.

In your specific case, you already have a part of what would be a buffer built up in your "billpaying" account, it seems. And your revised plan for using a YNAB-style buffer sounds like a solid and practical good idea.

As to budget numbers swirling around one's head, they stopped doing that for me a good year and a half ago. I would have to say it's a good thing.