Hello YNABers. My name is Jesse Mecham and this is podcast number 89 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.
Today I’m going talk about Rule Two. Normally that is where you save for a rainy day, meaning a day where a big expense is due – a large, less frequent expense that would otherwise have you blindsided. Property taxes, Christmas.
But what if – a podcast idea given to me by Erin, our lead teacher – what if you applied Rule Two to your income? Because we always talk about evening out the expenses – expenses are not even. People think they’re even; they’re not. They’re quite fluctuating. Vacation months are large expense months, Christmas is a large expense month, and then things maybe slow down in the winter when we all hibernate. But when you think of your monthly expenses, you always think of them as fairly evenly spread, and they’re not – they are up and down, all over the place. The average bills are your true expenses, and those are what you budget for with Rule Two.
But, just like we even out your expenses by taking Christmas where you spend $1,200 and deciding that you’re going to spend $100 a month – I’m doing air quotes, which you can’t see – you’re basically making those large, less frequent bills monthly bills, and then you do have a fairly even expense situation. When the cash actually goes out becomes irrelevant because the cash is there, ready and waiting to do its job. Can you even out your income if you have wildly fluctuating income? Absolutely. It works for expenses and income.
You can build up specific categories for your expenses, like car repairs and the Christmas fund we talked about; and you can build up in months as well. So there are three different ways that we give you to do it. You can pick the one that you like the most. You can build up entire months. So, let’s say you’re a real estate agent and you sell a lot of houses and you have a big, big month. And you know, okay, not every month is this big. So you’ve had a flush month. You can go ahead and just budget ahead with those current dollars. So you earn $12,000 where normally you earn $6,000, you could look ahead and say, “Well, I need this extra $6,000 to pad me for next month.” So you basically budget for the current month with $6,000 and budget for the next month with $6,000. That’s one way – just budgeting ahead, taking those dollars and applying them as if it wasn’t even there.
Another way you can do it is you can just build up categories. So you have a big windfall and you say, “Well, my most critical category is rent or mortgage, so I’ll just build that category up in anticipation of needing that money and not having it later on.”
Another one, that’s a little more of a… it doesn’t have you assigning those current dollars to future specific jobs, but it does have you assigning those dollars to the specific job of deferred income. We do this already a little bit when we say, “Well, this is income available for this month,” or next month when we’re basically saying, “The job of these dollars is to wait until next month.” You can do that even further. You can create a deferred income category and you just set it up like you would any other category, and then during the lean months you pull out money from that category as needed.
To pull money out of a category that has money in it, you budget negative money. It’s not always the most intuitive thing, but you’re actually pulling money out by budgeting negatively. So, you’re setting the money aside now but you’re making the actual allocation of those dollars with their future jobs later, when you have better and more information. That seems to apply fairly evenly across the board. The later on in the month that we are, the more we know about the month. So if you defer that income and just dump it into a deferred income category, you’ll have better information a few weeks from now than you do today and you’ll be able to allocate appropriately. That’s one other way to do it.
Again, if you decide to build up entire months or build up specific categories, you can still always adjust and juggle as needed as more information presents itself. That’s the one thing about budgeting people forget. When you get better information, you obviously make changes because you’ve got better information now.
So, either way, you’re evening out the income, and it adds a little bit of power to Rule Two where you can say, “Hey, Rule Two’s not just about my expenses. I also have a wildly fluctuating income and here’s how I can even it out.” It might make you a little more sane.
Now, when you follow Rule Two that obviously gives you some time, but some people with very variable income need to add a little more than that – they need to do a little extra to even things out.
Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.