In honor of the Four Rules Deep Dive happening on our podcast over the next few weeks, we’re reposting some of our favorite Rules blog posts. This one was originally published in February 2011. The video, however, is new!
When I ask you to list your monthly expenses, I’m setting you up to fail.
And to prove a point.
I use the word ‘monthly’ and your mind immediately thinks of the cable, rent, cell phone, groceries, gas, utilities…
So when you’re sitting there wondering why there doesn’t ever seem to be enough money for the month, you’ll do this quick and dirty calculation in your head, “Okay. Our take-home pay is x and we pay for the gas, and groceries, and cable, and rent…”
And you end up with a $300 surplus and you’re confused as ever.
You think your monthly obligations are just this nice, even line. But all of the stress you (unnecessarily) carry around proves otherwise.
Your actual cash obligations are much more like a roller coaster throughout the year. Up…UP…down..down..down..UP!!…down, and then of course we get to the holidays where they’re WAY UP and you’re freaking out.
So if we can accept that actual cash outflows are up and down all throughout the year, we can begin to get an idea of our true expenses.
Let’s take your semi-annual car insurance premium that’s $600. Once every six months, that bill comes due and your cash obligations are WAY UP. You scramble to find the money, cut back, stress a little bit, maybe put something on the plastic “just to tide you over until things are normal again” (Hint: there’s no such thing as a normal month.)
So…instead pretend your car insurance premium is due every month. This is Rule Two: Embrace Your True Expenses. Break up that larger, less-frequent expense into month-size chunks that you can manage.
Christmas? Let’s say you plan to spend $1800. $1800/12 = $150 per month. Just “celebrate” Christmas each month! It’ll make the actual Christmas that much merrier.
YNAB is built to do this. No other app does it better. Drop $50 from your Available funds into the Vacation category in January. Drop another $50 in there in February…and March. By June you’ll have a $300 (6 months x $50) balance in your Vacation category and you’ll be able to go somewhere fancy–perhaps Carabba’s.
Do this with any larger, less-frequent expense (property taxes, car insurance, life insurance, vacations, Christmas, furniture, home repairs, car repairs, braces, electronics, birthdays, anniversaries, 10-year class reunions–to pay for the gym membership for the six months leading up to it–your daughter’s wedding, car registration, higher heating bills in the Winter, higher cooling bills in the Summer, a new car, new tires, a new baby…)
Need I go on?
All that stuff between the parentheses right there, that’s the reason you aren’t getting ahead. Those plus your obvious monthly expenses make up your true expenses. You’ve been making spending decisions looking at the obvious monthly expenses–not the whole enchilada.
Rules One (Give Every Dollar a Job) and Two (Embrace Your True Expenses) compliment each other extremely well. Actually, Rule One only really starts to shine when you’re following Rule Two effectively. We’ll get to that later though.
We’re taking your cash flow roller coaster, with all of its ups and downs, and evening it out. Instead of having some huge outflow obligation in a given month, you just inch up your obligations for every month of the year. That month is then no different than any other month. Everything’s nice and even. Manageable. Uneventful. Dare I say it, quite boring.
And that’s just the way we like it.
Your Next Step
Budgeting is not restrictive. You won’t be spending less, you’ll be spending right. So what do you have to lose? Except all that debt and stress?