The other day I was interviewed by the founder of LivingLikeNoOneElse.com (also a fan of acronyms, you can find them at llnoe.com as well). One of the questions asked from the listeners was whether the YNAB software helped you time your paychecks to match with expenses.
Important Budgeting Question #1: How do I time expenses with paychecks?
This really is an important question, actually. Rule One answers this question.
But when you first begin using YNAB, you likely won’t be following Rule One, you’ll:
- earn some money
- record it as an Inflow
- budget it
- spend it
- (and hopefully save some of it)
And you do this every single time you bring in any money at all (paycheck, side income, cash you found in the cushions, etc.).
The budget it step is where the timing takes place. Your thought process would probably go something like this:
Alright, here’s my check for $1100. I get one every Friday. What expenses are coming up? Oh! We’re almost out of milk, and eggs, I’ll have to go to the store [budget it]. Did I pay the electricity yet? Oh, here’s the bill in my ‘To Do’ folder. I guess I didn’t [budget it]. The rent is due in two weeks, which means that this paycheck, and the next are the only ones to help with the $1,300. I’ll set aside $650 for it from this check [budget it], and the other half with next Friday’s check…
Rule One comes into play in answering this question because the above scenario is not the ideal way to manage your money. It’s too much micromanaging and ends up taking you much more time than necessary (though I should mention that there are advantages in doing this exercise when first starting out: you learn the software, become acutely aware of your (over?)spending, and build strong habits).
Okay, now let’s assume you have your Buffer in place, and, according to Rule One, you’re actually living on last month’s income. You would have recorded your income as earned, and would sit down at the beginning of each month and budget it. The whole thing. All at once.
Alright, there I have it. $4,400 (four paychecks) of income, ready to take on the month, all sitting in my account just waiting to do its job. Let’s see, the $1,300 of rent is due tomorrow [budget it]. Electricity will probably be about $85 again [budget it]. We’ll need $400 for groceries [budget it]…
And so on. Suddenly, a weekly exercise has become a simpler monthly exercise. The time savings are substantial, and the risk of not being able to sit down one time per month to sort through everything is much higher when you have to find the time four times instead of once.
When you’re living under Rule One, you don’t time your paychecks. Were all your bills to be due on the 1st, you could pay them without even glancing at your checking account. That’s the beauty of the Rule. It shouldn’t be written off so quickly. It’s huge.
Important Budgeting Question #2: How do I cope with a variable income?
I’ve beat on this before, but I’ll do it again. Variable incomes can be challenging when budgeting — if you’re living paycheck to paycheck. But when you’re following Rule One, the challenge is mitigated to, at most, a slight annoyance.
Imagine now, living on last month’s income, that you sit down for your Budget Meeting and look at your (hopefully) big Available number. This is the number that tells you what you have to work with for the month. That’s it. There’s nothing “gray”, “dicey” or “iffy” about it. That’s your number this month. You just need to decide what to do with it [budget it].
Another answer to the Variable Income problem is to prioritize your spending. You basically say, “I don’t know what I’m going to make this month, so when I do bring in money, I’m going to take care of these things (rent, lights, food) first.”
That’s a great strategy. It’s powerful when you see that you ran out of money before you get to the “Clothing : Gucci” category. Perhaps a light bulb just flickered: more money to retirement, less money to crocodiles.
And while Rule One doesn’t take away from this principle of prioritization at all, Rule Two embraces it. A zero-based budget is exactly the same principle. You budget until you run out of money. Obviously it would behoove you to (and reality will slap you if you don’t) take care of “first things first”, as Dr. Covey would say.
Make life easier and start living by Rule One!
Important Budgeting Question #3: How do I handle financial crises and still budget?
When you’re not living right on the financial edge, you’re smarter. While being smart may mean you already don’t operate right on that edge, not operating right on the edge also allows you to be smarter.
The one factor that contributes to more stupid financial mistakes than any other is TIME. Better yet, LACK OF TIME. In sports, timing is everything. In business, timing is everything. In personal financial crises, timing is everything. Operating under the shade-giving awning of Rule One allows you to sit back, completely evaluate a situation, and arrive at a logical, non-rushed, wise, in-line-with-your-goals decision. Only a buffer can do that.
You will have a legion at your command when a financial crisis decides to make its attack:
- According to Rule One, you’re living on last month’s income this month. So in May when something unexpected slams you up against a wall, you’ll have a portion of May’s earnings to buffer you from danger. (Those May earnings are there only because you’re living on April’s!).
- And with Rule Three in effect, you’re setting aside money on a monthly basis for non-monthly expenses (car insurance, property taxes, Christmas, etc.), so again, when you suddenly find yourself on defense, you’ll have money to make your play.
- Finally, Rules One and Three obviously are there for specific purposes (next month, and Rainy Days respectively), so you have Rule Four to guide you in paying yourself back for the disaster. If you can’t ‘Roll with the Punches’ and recover with just a small adjustment, Rule Two‘s Zero-Based Budget will tell you very quickly that you need to take alternative action to rectify the situation (drastically cut your expenses, make a short-term increase to your inflow, or perhaps call for an infusion from your emergency fund).
The important thing to note is that you don’t go into debt with the crisis hits, you make a wise choice because you now have some time on your side, and you stay on your feet with the budget, instead of throwing in the towel.
These are important questions to ask yourself when setting up your budget, and now you know. You have the answer to the age-old “timing” question with your paychecks, the variable income that’s always seemed un-budgetable, and the financial disasters that (will) strike, which used to snap your budget in two.
Those are all behind you now. So despite what you make think, budgeting works. And you need one.