A guest post by Mr. SixFiguresUnder.
I’m not stressed about our finances.
That doesn’t mean I’m not seriously focused on increasing income, paying off debt, and saving for the future. I think that’s healthy, motivating stress. It doesn’t mean there are no times that I feel overwhelmed by the size of the task and the measures we’ve taken to address it.
That does mean that I don’t live with the overwhelming, sickening sensation of constantly being almost drowned in financial troubles. I don’t feel like our situation makes me unhappy, scared, worried or short-tempered. If Stephanie has a contrary opinion, she’ll surely be in to correct me.
One reason for the low stress we feel about our finances is that we have built and maintain a cash buffer – one of the main strands of our financial safety net. More than anything else, our cash buffer eliminates the worry about meeting the bills and expenses of the month. In fact, as I began thinking about the different strands of a strong financial safety net for this series, the very first thing that came to mind was our cash buffer.
For us the cash buffer includes two parts.
- Living on last month’s income
- An emergency fund
Both pieces provide a cushion against large expenses or a change in income. We have talked about both of them before, but because a discussion of our financial safety net would be incomplete without them, we’ll cover them again.
Living on Last Month’s Income
I have to confess that I was hesitant when Stephanie first proposed living on last month’s income. Because nearly all our expenses are paid on a credit card, and our bills weren’t due until a month after the end of the statement period, we were generally living on the float. I loved the idea that the credit card companies were providing us a no-interest loan for all of our living expenses each month. It made me feel like I was winning the game, even when they had set up the rules.
But I knew my wife is a smart girl and if she was in love with the idea of living on last month’s income, it was probably a great idea. In addition, over the last few years she has become the manager of our family finances, so a change like this affected her more than me.
It turns out my wife is a genius.
Living on last month’s income works like this. In February, our family received a certain amount of income. Essentially, that income went into a jar labeled “March Expenses” and we never touched it during the month of February. Our only interaction with that income was to put it into the jar. On February 28, in our monthly budget review, we picked up the jar, counted it, and set the amounts in our budget expense categories for March to equal the amount in the jar. Then, we started paying March’s expenses out of February’s income. March’s income goes into a new jar labeled “April Expenses.”
(Note: We don’t actually have jars. The actual separation and allocation of funds is done in YNAB, our budgeting software of choice, which makes this really easy. Some people actually use jars, or envelopes, or some other method. As long as one month’s income is allocated for the next month’s expenses, the mechanism is less important.)
The beauty of this is that we know, on March 1, exactly how much money we have to spend in March, and we already have all the money waiting. We don’t worry about which expenses are due before the second paycheck, and if the first paycheck will cover them. We don’t worry about an unexpected change in March income leaving us unable to cover March expenses. The money for March expenses is already there. We don’t worry about getting busy and incurring a late fee because we forgot to pay our credit card balance on March 22; we already paid the statement balance at our February 28 monthly budget meeting. All we have to do in March is put our March income into our “April Expenses” jar, and live within our budget categories for the month.
But we have two older vehicles, each with over 200,000 miles on them. What if one of them dies in March? We don’t have large sink funds for car replacement. That’s a decision we made when we decided to focus strictly on paying off the student loans. I need a car to get to work. Stephanie needs a car to pick up the kids from school and handle all the other family business while I’m at work. We would have to purchase a car, and that’s not part of our budget categories. The safety net is built for times like this. This is when the emergency fund comes in.
Emergency Fund
I don’t think an emergency fund requires a lot of explanation. It’s a pretty common idea. You set money aside and just let it sit there until an emergency comes up. Our emergency fund right now is made up of just over $5,000 sitting in a savings account at Capital One earning a few dollars of interest each month.
We’ve never spent more than $3,500 on a car, so I hope that would be enough to make the purchase if we had to replace one. If both cars went out at the same time, or if some other large expenses came up, we’d be left with no emergency fund to speak of, so we’ll be adding to the emergency fund over the next several months, building it up so that after a large expense or two, we still have a meaningful safety net.
$5,000 is a pretty small emergency fund. Most financial gurus advise 3 – 6 months of living expenses. Ours is about 2-3 months of our current low living expenses, but we also have an additional month of buffer because we live on last month’s income. We’re running lean right now with our focus on paying off student loans, but we’re comfortable with it in our current circumstances. If our fixed expenses were higher, we’d have a larger amount set aside.
And that’s our cash buffer. We avoid the daily stress of wondering if our income can cover our bills by making sure we have an entire month of income sitting there, waiting for us, at the beginning of each month. We pay off all our credit card balances, using that income, at the beginning of the month, so we don’t have to remember which day the balance becomes due and we never worry about late fees. We keep an emergency fund on the side for larger expenses.
By itself, a cash buffer is not a full safety net, but a safety net without a solid cash buffer would have a huge hole in it.
It’s tax season, and many of you have just or will soon be receiving a tax refund. If you’re working towards living on last month’s income or building an emergency fund, that’s a great source of funds to get closer to those goals.
How About You?
- What do you have as your cash buffer?
-Mr. SixFiguresUnder
Other posts in the Financial Safety Net Series
- Intro to Financial Safety Nets
- Why a Durable Power of Attorney is Part of Your Financial Safety Net
- Insurance We Do and Don’t Carry– Our Cost, Coverage and Reasons
Curious what your opinions are of the “new” YNAB, which has gotten rid of the “available next month” / “buffer” idea. I like the new one in general, but I really think that concept needs to come back, and there are a number of users on the YNAB forums discussing workarounds to keep it there.
Have you tried it yet?
A cash buffer saved us last year. My husband went through a serious depression and was out of work for 10 weeks. He’s 100% commission and I stay home with our 2 kiddos. It was such a blessing to have the money to float us through that time. It will probably take us a very long time to save up again, but glad we had it.
It does feel good to live out of last month’s income. I have realized that if I pay myself first, everything works out great. In that case I can always assure I add something to emergency fund and something for particular goals. Another thing is the mentality. Mentality that I cannot rely in next month’s income. Why? Because I don’t have this money yet, so I don’t count on it until I actually have it on my bank account.
Great article, I really enjoyed it! You have done a great job 🙂
Great article! We also live on last month’s income. At the beginning of the month we just move the money into an account that is strictly for paying bills, then its ready for us when we need it to pay our credit card! We also try to put all our expenses on a credit card…the points are like free money!
Our emergency fund is sitting right around 10k, but that is mostly because we know we may have some medical bills coming up and want a nice safety net!
Thanks again for you post, it was great!
Great post! Lots of good points. It’s amazing how much peace and calmness having an emergency fund adds to your life, and how much better your sleep is at night! Our EF currently sits at 10K. Although our expenses are very high, my husband and I both feel very comfortable with this number, so are keeping it there as we currently work on paying off our cars…
Love this, and the concept and importance behind it! Found you on thrifty Thursday!
Cathy
We are doing our best to live off of last months income! We have been focused on our budget and living within our means since the New Year (we got married in November and decide this may be a smart move, now that everything was official >.<).
Anyways, we have done really, really well since January, making it all work. We are both in our last year of college, working our full time student teaching internship (unpaid, obviously) and working part time as much as we can throughout the week and on weekends. Which is easier said than done. Next month it is looking like we will need to dip into savings to make Aprils bill requirements…and I'm not to thrilled about that at all. April is going to be a lean month.
For some reason, the title made me think that this was going a different direction and made my think of my physical “cash fund.” My fiance and I keep a fund of cash on hand. We contribute to it whenever we get some extra cash from selling something on a facebook group, my sales at a craft show, cash birthday and Christmas gifts, etc. Then we have extra cash on hand when a great deal comes up, for example, we were able to buy a really nice used recliner for a great price by taking cash out of the cash fund. It also serves as an extra little emergency fund. Anyway, I know this wasn’t the topic addressed, but I just wanted to share!
We’re not terribly good at designating money as an emergency fund. We have substantial savings (enough to last 4-5 years if we had no income) and no debt (not even a mortgage); but we haven’t designated our savings as emergency fund, kids’ education fund, retirement fund – it’s all pretty much in a big pot we just don’t touch. We both work part-time and earn an income that is slightly below median (combined, it’s a very good income); we’re just not big spenders. My husband refuses to budget. His idea is that you spend the money you need to spend and it’s pointless budgeting X for groceries or X for gas because you can’t control the prices. I’m pretty sure most people think we’re poor. We all dress from discount shops and hand-me-downs, our cars are 10+ years old, etc. But, I figured out years ago that more money just means you can afford more expensive stuff, but it doesn’t fundamentally change anything. I like where we are now. I like knowing that we can go on overseas vacations every year, that we don’t have to worry about fluctuating grocery prices, that if one of our cars dies on us we can go out and pay cash. At the same time I’m hoping to live another 50-60 years, and I don’t want to have to eat cat food; we have two kids to get through college and I’d like them to be able to start off their adult life debt-free; so we have some big bills ahead of us.
My goal is to live on last month’s income after I have finished paying off my debts. I’m only a few months away from that goal, and then I’ll really start saving money for that. I do have a few dollars budgeted in now to start building that up, but, like your family, paying off the debt is the top goal so I am living pretty lean until then.
I do have an emergency fund, and it too is rather small in comparison to my expenses, but I chose that simply because the debt repayment process will only take a few months of solid focus. Saving for a larger emergency fund of 6 months of income is also on the docket after repaying the debt!
I technically live on last month’s income, but I actually really want to get 1.5 to 2 months ahead instead of 1 (in addition to my e-fund, which also sits in its own savings account.) I get paid mid-month and on the last day of the month — so although I’ll use March’s income in April, it still feels like kind of a last-minute scramble because I don’t see half of March’s income until the day before April. Ideally, I’d like to stock my checking account up with the equivalent of that second paycheck (to begin with) and then a whole extra month, just for fun, I guess.
This is a goal I want to have for my family. It would be so much less stressful if we were essentially a month ahead on all of our bills. First though I want to have that emergency fund in place. We are currently working on it and are close to having our beginner emergency fund in place.
Thank you for this wonderful idea!