While Jorji and I were searching for budgeting software on the internet, we were fortunate enough to also discover a budgeting methodology that has changed the way we will do budgeting for life! I got so excited about this strategy when I first read about it. I could not wait to tell Jorji!
We were budgeting every paycheck and blocking out precisely what we would spend and in which paycheck we would spend it. We did this so we would not overdraft our account. Needless to say this was very tedious and meticulous; but it seemed the only way we could cover all of our expenses. Even at that, frustrations still ran high as the credit card balances steadily increased.
This methodology is based on 4 simple rules. YNAB considers these rules to be the most important aspect of budgeting; even above the software. The software is the tool that allows you to easily incorporate the rules into your budgeting.
Give Every Dollar a Job
Following this rule means that we basically do zero based budgeting. That means that we budget every dollar, which gives each dollar a purpose. If there is money left over after expenses, then it is assigned to something; perhaps savings, a vacation fund, or a big night out. This has been a great way for us to budget because we make the decisions together! We have an understanding that we don't deviate unless there is a good reason that we both agree on. This discourages the emotional impulse buys that often occured because we knew in the back of our minds that we had some extra money this month. With 2 people thinking that, well you can imagine what typically happened. It wasn't pretty.
Save for a Rainy Day
Jorji and I discovered that large expenses would often creep up on us when we least expected it. We generally used credit cards to get us out of these pinches, with the thought that we would pay it back with extra funds next month. Well, usually things never got paid back. We would forget about it or not have time to figure out how to pay it back.
My big break through was when I finally realized that this had to change if we were to ever get out of debt. Jorji and I sat down and figured out all of our periodic (do not occur every month) expenses for the entire year! The results shocked me! Before this you might say that I was financially near-sighted. Nearly 12% of our income was needed to handle periodic expenses! Those expenses would typically end up on a credit card!
Rolling With the Punches
I had a huge ah-hah moment when I first read about this rule! This rule is used to cover our mistakes that often happen in a budget. What happens when we overspend the budget! Well, most of us live in the real world where real things happen; so why not incorporate a strategy that deals with reality. When overspending occurs, the income budgeted for next month is simply reduced by the amount overspent. This has a way of spreading the impact out over all your budget categories rather than punishing a single category. We do all we can to stay within budget; but handling overages this way smooths out the rough spots and keeps us motivated to stay committed to our budget plan!
Stop Living Paycheck to Paycheck
I think we all feel that there has to be a better way; but if you are like Jorji and I, we didn't know how to achieve it. This concept really excited Jorji and I, because we were looking for a way to save up an emergency fund that we would only use for true emergencies. These would be totally unexpected things that would come up and require unplanned funds. Like blowing an engine out of the car, a serous illness, or the loss of income. We have lived paycheck to paycheck through most of our lives! The thought of being able to change that was so exciting! This rule is that we add to savings each paycheck until we have one months worth on income just sitting in our checking account. Then we budget this month with money we earned last month. The buffer stays in the account. We have already accumulated some money in our buffer and am excited about completing it. In fact our goal is to get 6 mo worth of expenses in an emergency fund. YNAB has the features that will help us achieve this goal!
For more information on this budgeting methodology click the link below.
Bookmark this link for future reference, this will forever change your attitude about money, click here...
