You’re strongly encouraged to save one entire month’s expenses (how can I manage that?).
What to you do if you don’t have one month’s expenses saved? You enter all inflows as “supplemental”. That allows the inflow to hit the current month, instead of the following month. You will have to deal with a few disadvantages if you operate without a buffer:
- You don’t have the piece of mind of living one month behind your income
- If you overspend, you’re more likely to overdraft because a buffer isn’t in place. It’s still not very likely, but it is more likely.
- You will need to budget each time you have a significant inflow instead of just at the beginning of the month.
So why do I encourage it so much? Can you get by without it? What are the advantages and disadvantages of doing it? I hope I can answer these questions in regards to what I think is the #1 budgeting tip: saving one month’s expenses.
The Origin of Rule #1
You might want to throw tomatoes at me when you realize how easy my wife and I had it when we first implemented the rules of YNAB. Unlike many of you, who I’ve pushed and prodded to get your one month’s expenses saved, we already had ours. And I’d like to thank every single person that gave us money on our wedding day for it – because that was where most of the money went – nowhere (it stayed in our checking account).
I married Julie in February of 2003, so it still hasn’t been too long ago, but I remember vividly thinking about our future financial situation before we were married. I was slightly worried. I might have mentioned this a bit in the About Us section of the website, but it bears repeating here. Basically, Julie had another semester and a half of school left to get her bachelor’s degree in social work. I’m still not done – had three years of school on the horizon at the time of our marriage. Julie was working at the University Library, I was teaching German to missionaries. Combined we were making about $18 per hour. But we were only working 20 hours per week (I’ll save you the time of calculating it: annually it works out to be about $17,000 per year), because we were both full-time students.
I don’t want any pity here, this is to draw a point.
And the point is that it would’ve probably taken us two to three months to save the buffer. We had it easy because we exercised some discipline and didn’t spend the money on a new Kitchen-Aid Mixer, or anything else for that matter – it just sat in our checking account.
Our buffer was in place.
With my worrying about our finances, I decided to construct an Excel spreadsheet that would help us track our spending. Later on I realized we should probably track our income. Much later I decided we would track our account/savings balances (which I’ve discontinued, it isn’t worth it). I had a row on the sheet for every day of the year, and a column on the sheet for every category. There was absolutely nothing dynamic about it. If you’re a 1.0 user, you’re seeing some of the dust from that legacy system set up long ago. 2.0 users see something entirely different (and better).
One night, Julie and I were talking about the money issue. I asked her the question, “Since we don’t know if we’ll be working 18, 20, 22, or 25 hours each week, how are we going to know how much we should budget each month?” She didn’t really have a good answer. I certainly didn’t.
That night I realized we could take a month’s worth of expenses from our wedding money, stick it in the checking account, and live on that for the current month. The following month, we would live on last month’s income. I talked the idea over with Julie in the morning and she was all for it (bless her conservative heart). The buffer was born.
Advantages of the Buffer
Using our personal experience, I want to highlight some of the advantages we’ve experienced living with the buffer that has kept us out of the paycheck to paycheck rut. I’m sure you will have similiar positive experiences if you choose to live by this rule.
I’ve noticed that the buffer imposes some pretty conservative limits on you. If you have a blow-out month as a real estate agent, where you make twice your average in a month, you don’t go blow your money on something unnecessary. The reason being? If June was your hot month, you can’t even touch the money until July. Time tends to dampen (I might even say correct) some of those wild desires you have when a Franklin or two hits your palm.
I interned temporarily this last Winter semester full-time, and made a lot more money than I do working part-time at my current job (no, YNAB is not my job :)). January was a great month for us, and February was even better. But because we had these “windfalls” not hit the budget until the following month, respectively, we exercised a bit more discretion. We didn’t spend any of that money until we had sat down and budgeted for the month. That helped us be conservative and smart with our money.
The Variability of Income
As you certainly have already picked up, when you spend last month’s income this month, you know what you have to budget and you budget and spend/save that money. There’s no guessing, averaging, forecasting, wondering, hoping, dreaming, etc. The month is gone. Here’s what you have to spend. Be wise.
I address this advantage in a bit more depth here.
Financial Crunches are Gone
When you have one month’s expenses at the beginning of the month, before you’ve earned any money currently, you’re sitting on a nice, plush, cushion. It feels good! Others can certainly attest to that as well.
You notice when you have flexibility, when you aren’t toeing the line of financial crisis every minute of every day, that you make better financial decisions. You aren’t rushed. You aren’t worried. Emotion plays only a minor role in your decisions (verses the only role, if you’re stressed), and you can trust yourself to breathe, take a step back from a situation, and make the correct choice.
You couldn’t care less if all of the fixed expense bills come due on the first of the month. You have the money to pay them. No more worrying about when your next paycheck will be deposited, when the rent is due, etc. If it happens in the month, you’ll take care of it during the month (I’ll address expenses that come in larger chunks in a later article).
A Disadvantage to the Buffer?
A few naysayers have brought up the point that lagging behind a month with your income, also means you lag a month behind in your saving. If, in July, you take-home $3,000, you don’t actually do anything with that money until August. That means potential savings dollars sit in a non-interest bearing checking account (maybe it does get .0025% interest or something like that) without making you any money.
I’m all for your money earning you more money.
But you need to remember two things: most retirement investment is automatically deducted from your paycheck into a 401(k) or Roth, or Traditional IRA. That means that money is never even hitting your budget in the first place anyway. In 2.0, we moved to recording only your take-home pay (excludes possible life insurance, health insurance, retirement, and extra tax withholdings, among other things). This move has saved us all lots of time. So no – your savings isn’t lagging.
And if you don’t have your savings on autopilot and do manually initiate the transaction each month (which is totally fine, although not my preferred choice), you still are only lagging behind one month. Which is miniscule when taking a step or two back from the situation and seeing the forest, instead of just a few trees.
The one month buffer is a strong, strong component of your financial system. It keeps you conservative, and flexible, removes the problems of budgeting with a variable income, and saves you stress from living on the edge.