The One Month Buffer: Down & Dirty

The #1 question asked of me by those people just starting YNAB is how exactly to get going. As you know, to use YNAB most effectively you should save one month’s expenses (hereafter known as the “buffer”).

I’ll address the following issues or concerns (also, see the setup guide):

  • Where should you physically put this money once it’s saved?
  • How/Where do you enter it into YNAB?
  • Why is this rule in place?

We’ll start with the last bullet point. The reason you want to have one month’s expenses saved is so you can stop living paycheck to paycheck and begin living on last month’s income during the current month.

Notice in January and February that your expenses exactly match your income. This might be a bit presumptive, as many people are spending $1.22 for every dollar they currently earn. But we’ll work with it for now.

Guess what happens at the end of February? This user discovered the YNAB Personal Budget and has decided they’re going to get their financial act together. Notice in March that a bit of the “Buffer” has appeared. Expenses were forced to decline so this extra cash could be found (you could also increase your income on a short-term basis by working overtime, another job, etc.).

In April, May, and June the user continues working hard to acquire the buffer amount that needs to be equal to one month’s expenses. As you can see above, by the end of June the user has reached the required buffer amount (buffer = expenses).

From that point on, you can go back to expending everything you earn, but what you don’t see from this chart is that the income for July through December is not that month’s income – it’s the previous month’s. (NOTE: Do I recommend you spend everything you earn? No, “Expenses” here in this sense also mean monies that go toward Savings goals such as retirement, college, etc.)

Alright, now let’s take a look at the flow of this user’s money once the buffer is in place.

First, notice the major difference at the beginning of the month. You have a whole previous month’s expenses sitting ready to be budgeted and spent/saved. As the month progresses to day five, notice that your expenses have increased a bit, directly reducting the money you had earmarked to spend this month (that’s all okay though, you’re operating on a plan!). Look at day ten. You’ve now spent half of the money you had available at the beginning of the month.

Day 15 is where it gets particularly interesting. This user is paid on the 15th and 30th of each month. Notice the BLUE amount suddenly pop up (1/2 of the monthly income). That money will just sit there, waiting for the following month so it can be budgeted and spent/saved.

As the month progresses, our money we had at the beginning of the month slowly declines, as our expenses slowly rise. On the 30th we’re paid again, and, sure enough, the current month’s income equals that month’s expenses. But remember – you’re done with this month! The current month’s income is about to become the “previous” month’s income, ready to be budgeted and spent/saved during the next month.

So where do you physically put your buffer money? In your checking account. Here’s what it would be like for me if I had to scrape together a month’s worth of expenses:

I’d get intense, first of all. Remember, I’m living paycheck to paycheck, so any extra I make I’m just throwing into the checking account. The first month I might end up with only $100 at the end of the month. After month 2, maybe I hit it big and saved $400. Month 3 was also strong, and I saved $600 by selling some stuff on eBay. That brings my total at the end of month 3 to $1100. I need another $900. I work tons of overtime, sell some more stuff, and really cinch up the belt on the budget. We manage to get another $900 together that month. At the end of month 4 I have $2000 – equivalent to one month’s expenses.

With my buffer in place, it’s time to start the YNAB Budget at the beginning of month 5. I take the $2000 and I put it in as a SUPPLEMENTAL INFLOW in the YNAB budget. I now have $2000 available to spend during month 5. And I do just that.

But what else is happening in month 5? I’m earning money. At the end of month 5 that money is available to spend during month six. You’re now out of the cycle. Congratulations!

Hopefully this clears up any confusion about getting started when it comes to your personal budget. Of course, if you have any further questions, you can always contact me.