I recently stumbled across these four rules by YNAB that you can use to help drive your budgeting process. They create a nice framework of standards to shoot for when you’re first getting started with your finances.
Strive to Live Beyond Paycheck to Paycheck
At some point in our lives, we all live paycheck to paycheck, whether it’s just out of college, or after a financial hardship. In other words, we need the next month’s paycheck to cover next month’s expenses. There is no reserve. You’re not “a step ahead”.
As long as you consistently spend as much, or more, as you earn you will remain in this state. How do you break free? How do you stop living paycheck to paycheck? There are two approaches to take: either reduce your spending or increase your income. Actually there’s a third approach: do both.
Regardless of your approach, if you do it consistently from month-to-month, everything else being equal, you will stop living paycheck to paycheck. As for your budget, you get beyond paycheck-to-paycheck by budgeting less money in expenses than you receive in income.
Give Every Dollar a Job
Giving every dollar a job is assigning every dollar that comes into your budget (i.e. income, found money, lotto winnings) a specific place to be used. “Give every dollar a home” is the phrase Dave Ramsey uses, I think.
For instance, let’s say you have $5,000 in income. To give every dollar a job, you would assign money to your known (fixed and variable) expenses, giving, saving, and even assign money to some unknown or unexpected money.
At the end of your budget process, you will have $0 left over. This does not mean you haven’t saved or given though, because you have specifically assigned dollars to those categories. And because there is zero left over, this is often called a “zero-based budget”.
Save for a Rainy Day
The save for a rainy day concept is a familiar one. We should each set aside some money from month to month that is reserved for the unexpected. This can be for a job loss, car repair, medical expenses, lump sum expenses, whatever.
Everyone at some point is going to experience an unexpected loss or need to pay for a big expense all at once. By saving for a “rainy day”, you’re more prepared for when that time comes. I typically refer to this as an emergency fund.
Roll with the Punches
Got to love a good boxing analogy. Rolling with the punches is all about taking life’s financial ups and downs in stride. Budgets are not about perfection. They’re about improvement. Creating a budget sets up a standard in your life. Sometimes we don’t live up to that standard. That can be because we failed or it can be through no fault of our own. The key is to have the standard in the first place. Then, make it up next month and not give up.
Believe me, even people who live and breath personal finance every day make mistakes with money. It’s how you respond next month, and over your entire financial life, that makes the difference. Hat tip to the folks at You Need a Budget for sharing these 4 rules. If you are in the need of a proven budgeting software system, be sure to take advantage of You Need a Budget’s 7-Day Free Trial.
Photo by bigburpsx3