Beware of Overconfidence with Rule #4

Based on comments made by customers and readers, sometimes I get the feelings people must think that my wife and I are immune to the financial buffetings of the wind of life.


I will offer a small glimpse into our personal financial life with this article. The idea for it came to me last night – right after we had finished entering some Outflows into YNAB. It made me realize something that I thought I should pass on to all customers, potential customers, and casual readers: “YNAB’s Fourth Rule of Cash Flow may lead you to fiscal complacency.”

It’s blunt, but true.

I’ve actually thought for a while that I should write about Rule #4 in depth, much like I wrote about Rule #1, because its power seems to evade people when they take their first or second glance. It’s an extremely powerful rule for your Cash Flow. What I realized last night is that it is so powerful it can lead you toward a complacency when budgeting.

Alright, Rule #4, if you’re just stopping in for the first time, means that whatever you overspend in a month, you remove from your available money to spend in the next month. If I normally have $2,500 available to budget each month, and I overspent in the Grocery category by $50 in the prior month, my available money will drop to $2,450. I’m paying myself back for mistakes of the past. It really does work!

On the site I even write that you don’t even “feel the budget make its gentle corrections.” While that’s the best part of the rule, it’s also the most dangerous! I’ll use mine and my wife’s situation to illustrate just how dangerous this can become.

During my second to last semester of graduate school (last Fall) I cut back on the hours I work at my job. I thought we could get by with me working about 20 hours per week. This happened mainly because I was kind of getting burned out – was extremely busy with school, and this site – and wanted to spend a bit more time with the family. So, we decided we could get by on me working 20 hours.

In October we overdrafted a bit in our budget. I figured we’d make it up in November. In November we overdrafted. With December coming though, I knew I’d be making more money because I could work full-time during the winter break. So I thought we’d make it up. Of course, Rule #1 of YNAB states that you live on last month’s income – so that December extra money wouldn’t even come until January.

Well, December was more expensive than we had originally anticipated – and we overspent. Three consecutive months of overspending meant we had very little to work with come January. Well, January isn’t looking so hot now. We actually used a cash infusion from our emergency fund to help pay for our health insurance premium (I had been putting off throwing that money into a Rainy Day fund for the few month’s prior because we were just trying to catch up on the ‘now’ expenses). So that health insurance premium hit us big time (we have to pre-pay an entire semester’s worth of insurance).

Health insurance is not a valid emergency fund expense.

I’m now working at least 30 hours at my job – trucking through my last semester in graduate school. February will be interesting because we’ll start the month with only about $1,000 of available money (all of these past overdrafts come back to haunt you if you don’t make up the difference by either making more or spending less in succeeding months). I don’t want to divulge too much personal information, but our rent represents more than half of that amount.

So what happened? Why didn’t we cut back our spending in the face of obvious looming problems ahead? We grew complacent with the budget.

We’ve used YNAB since we’ve been married. Well, we used an original version of YNAB that was pretty ugly. Selling the thing has sure improved the usability of it. But we’ve used the rules of YNAB for almost three years. We have managed so much in those three years! Julie finished school. I’ll finish in a few months. We don’t have any student loans. We had a baby. We own our car (instead of the bank owning it). We don’t have any credit card debt. We’re doing quite well when you consider that we’re just about to a master’s degree – where most people are at their poorest in life. I don’t attribute this to anything except a willing wife and the Four Rules.

So what I’m saying here is this: we know how YNAB works better than anyone! We’ve seen how the principles force us to be conservative, assign dollars their jobs, and save for rainy days. The rules really work.

And we knew that Rule #4 really works. We knew it so well in fact that we started virtually “borrowing against it” in a sense. No, we don’t borrow money. But what we were doing was virtually the same thing. A non-YNAB credit card user would use the following logic when charging a purchase and, thus overspending: “I’ll spend less next month and be able to pay this off.” We were doing virtually the same thing! “Well, we’ll just buy it now because we need it now. YNAB will suck it out of next month’s available money, so we’ll just spend less and make up for it.”

Amazing isn’t it? Rule #4 is so powerful, so graceful in how it guides you toward fiscal conservatism, that we forgot who truly controls the spending: We do.

If you pick your favorite rule of YNAB, and only hold on to that one, without addressing the Four Rules as a whole, you’ll start to go under. I don’t want to make it seem like we’re having any big issues. We got it taken care of last night. We talked it through and we’re resolved to fix it! What are we going to fix? Which rule did we tend to ignore? Do you see the writing on the wall?

Rule #2 became second rate. We didn’t pay it nearly the attention it truly deserves. Rule #2 of YNAB is the zero-based budget. You give every dollar a job. What that does is create spending limits in each of your categories. We were not paying enough attention to those limits! If the limit is there, then you stick to it no matter what. If you’re out of milk for the month, you either take from another category in that month or you don’t buy the milk! You should not begin to rely on Rule #4 in such a way that you overspend in the month -make no adjustments for it – and expect to simply make it up in the next month. A pattern of such behavior will lead you to exactly where we ended up – needing to use our emergency fund money to pay for a non-emergency. Bleh.

Consider this a fair warning from the biggest YNAB fan of them all, its creator! You must abide by each rule of YNAB. Do not grow too comfortable with Rule #4’s power to smooth out the bumps. I guess sometimes those bumps make for good reminders. We used YNAB for three years before I finally came to this realization: Regardless of how powerful the rules are, it is still up to you to exercise the discipline necessary to stick to every single rule. Don’t play favorites with the Rules!