One of the major changes we made to our budgeting strategy after learning the YNAB method was “living on last month’s income.” And boy has it been a game-changer!
What is living on last month’s income?
In traditional budgeting methods, people assign amounts to spending categories according to the money they expect to earn that month. With the YNAB method, you only budget money you actually have.
In the beginning, this will mean that with each paycheck you will decide what expenses that paycheck needs to cover until you get paid next. When the next paycheck comes, you decide what the next priorities are. You will be allocating funds to your budget categories each time you get a paycheck.
The goal is to get to the point where all the money that you are budgeting (and spending) this month is money that was earned last month. The progression continues that the money you earn this month will be used for next month’s budget.
I’ll talk more about how to start living on last month’s income in a minute. First I want to tell you why it’s awesome!
Benefits of living on last month’s income
The money to pay bills is already available. There’s no need to check account balances and worry about whether you can pay the bills before your next paycheck comes in. Since the numbers in your budget represent actual money, when you assign $100 to car insurance at the beginning of the month, the money is just sitting there waiting for you to use when the bill comes due.
You know exactly how much money you have to budget each month. Even if you have variable income from ten different sources, you will still know exactly how much money you have available to budget because it’s all the money you earned last month. Budgeting with real numbers removes the guess work and really puts you in control.
You have a buffer just in case. Just this month we had an experience that made us extra grateful that we are living on last month’s income. I’ll write more details (and a warning) soon, but the bottom line is that Federal Loan Servicing automatically withdrew $697 this month. Our “amount due” is usually $0 since we are on income-based repayment and aren’t making enough to require payments right now. Apparently it was time to renew our qualifications for the program, but we didn’t know that. If we had not been living on last month’s income there would not have been enough money just sitting around in our checking account. We would have been kicked off the auto-payment program that lowers our interest rate by .25%.
Peace of mind and less stress about money. Having peace of mind may seem obvious after reading the other benefits, but I think it deserves its own attention. Feeling uptight about your finances all of the time is so emotionally draining and hard on relationships. It’s amazing how much less stress we feel not worrying about if we’re timing our bills right or if we’re over-estimating how much money we’ll make. Peace of mind is the biggest reason that I recommend living on last month’s income.
How can I start living on last month’s income?
You can start changing your mindset by only budgeting money you actually have. Budget each paycheck as you get it. The excellent YNAB classes will walk you through the steps on how to do it.
In order to live on last month’s income, you’ll have to save up a month’s worth of income. You can save by putting money aside each month. A tax return, bonus, or other windfall you can expedite the process. Of course, if you have a month’s worth of income just sitting around somewhere, you can start living on last month’s income right now.
A crucial part of living on last month’s income is having a reliable way to track what income you are “allowed” to use and what income is for next month. If you’re good with spreadsheets, you can create your own version of YNAB, but for us, even though we are quite handy with Excel, it was much simpler to use YNAB’s powerful software (plus, it’s pretty). You can give it a test drive for a 34 days free to see what I’m talking about.
If you are happy with your own spreadsheet or use another budgeting tool, I highly recommend watching the online YNAB classes anyway. They explain better and in greater detail some of the philosophical changes that have made such a difference to us in our budgeting.
If you’re looking for more guidance on living on last month’s income, you can get my Guide to Getting a Month Ahead for free when you join my email list!
Free when you subscribe!
Get frugal inspiration and financial motivation in your inbox every week, plus you'll also get the Guide to Getting a Month Ahead Financially for free!
We love living like this however, we’ve always doneit just a bit differently. We like to go ahead and pay our bills up as far as we can. Like… for example, if we get a large income tax refund, we put say $400 to electric, $200 to phone/internet, etc….. However, we always say that we are going to keep paying the bills as they come in and we end up going through a dry spell with my hubby’s business and fall behind. This is one of the best budgeting posts I’ve read online so far and I’ve found a good amount since I’ve decided to get ahead and stay ahead next year. ~ Thank you! ~
That’s so nice to have money extra money set aside for your bills so that you can depend on it in the lean months!
My husband is 100% commissioned sales and has very seasonal work. We fortunately don’t have debt but have to deal with making almost nothing sometimes in the winter months and so we started making our budget with the previous month’s income. We still use Mint and it’s been great for us, but YNAB sounds neat too.
What we do is have his paycheck direct deposited into our savings account. We always make sure to keep a balance of some sort in our checking. When we get together to plan April’s budget, we base it on his March income. When the income is small we do our best to make it stretch, but there are months that is impossible so we “draw” from our savings. Once we figure out how much we have budgeted for spending, we transfer that amount to our checking account. The majority of months, our budgeted spending is less than our income, so whatever we don’t transfer just stays in savings.
We have always struggled to budget, but this seems to be working for us, especially with a highly irregular income. It is nice not worrying about if the money will be there or not, since it’s already earned, and it’s nice to be able to budget for irregular things like homeschool supplies or clothes in the months that he makes more than enough.
We thought it was kind of an unconventional way to do things (as we do follow Dave Ramsey’s methods loosely) so it’s nice to know that others budget with last month’s income. Thanks for sharing!
I wonder how this will work when the hubby is married to the debit card and refuses to give it up, despite causing financial potholes in our finances. No budget because he thinks it will make him have to be nickeled and dimed to death. Feel this would work except for my debiting darling spouse. Any suggestions-won’t go to debit counseling for reasons listed above. Aaauugh!
I am so glad I stumbled upon this blog entry. I am just now starting to get my financial wings under me, at the age of 25, after sowing my wild oats the past several years and enjoying minimal responsibility. I am so excited to START my independence in this way, living on last month’s income. How genius!! And you’re so spot on, peace of mind should not be undervalued, I think it’s the most important component/perk of this plan!
It is genius! I wish I could take credit for it. It makes so much sense though and is so freeing!
Wow, sounds like a great way to get started budgeting!
We love it!
This is such a smart way to live! We always assume that things will continue as they have always been. I wrote a post recently called “3 Things We Wish We Had Done When We Had More Money” where I talked about the idea that we always assume we can rely on the next paycheck. We learned firsthand that that isn’t always true. We live this way because we never know when the next paycheck will come or how much it will be. It does make life so much less stressful. Thanks for sharing!
Yes! It is so much less stressful knowing that you can be fine without a paycheck, at least for a while! Living paycheck-to-paycheck probably takes years off your life in stress!
Hi I just found you on Pinterest and just in time too. We are a military family living overseas. We had all but student loans payed off before we moved but had to purchase a used car and with moving expenses, military scew up with our car (we now have 3), the extreme cost of food, and a trip back to the US to visit family we found ourselves unsure where to get the money to purchase formula for our twins. With moving every 2-3 years things get very expensive and living in the last months income would be amazing! We are starting the new year by jumping in and getting this mess straightened out so we don’t have to be in this position again.
That’s frustrating Megan! Living on last month’s income really takes so much of the stress out of budgeting and finances in general. Good job taking on the task of getting things straightened out in the new year! Best wishes!
I just wanted to tell you I’ve come back n read all the posts you have about ynab because I downloaded the free trial and I love it!! it took a little effort to get the hang of it but now I gaze at my beautiful budget everyday and excitedly wait for a new transaction to enter… haha (not quite, but almost).
I’ll be purchasing the full version soon… as soon as the budget will allow me to (oh the irony!)
thanks for answering all my questions in the other post!
Ha ha! I totally know what you mean about being excited to have a transaction to enter! 🙂 I’m glad it’s going well for you Georgia. YNAB has helped us tremendously!
We love love love YNAB!! It helps you prioritize saving and forecast your future cost, plus the reports help you see where your money is going. They have great principles too!!
I totally agree Chelsea! 🙂
YNAB is improving our marriage. After we (I!) used Quicken for 22 years and DH still didn’t know how to use it, we finally stumbled upon YNAB. We love being able to see and enter transactions on our phones and iPads so that we can do it while it’s fresh in our minds, and then we’re both in the know at all times. And knowing what jobs our dollars are doing has been huge in regaining control of our finances, TOGETHER. Get YNAB today!!
Thanks for sharing your experience Heidi! That’s awesome that YNAB has made a difference in your marriage and communication about finances!!
You can get YNAB for free as a student. You need a school email address and something to verify you’re active, but they’ll send you an activation code for a 1 year free trial. If after that one year you are still a student, you just re-verify and you get another year.
Yes! It’s exciting! When that announcement came out, I added it into my first post on YNAB (and emailed all my friends and family who are still in school)!
YNAB/Living on last month’s income sounds like just what my husband and I need. We are both chronic and compulsive spenders and do not budget. We just got married and you can probably imagine what a mess paying for the wedding was. I knew that would be the last time I flew by the seat of my pants financially but didn’t know what the game changer would be. We have committed to Sunday night “budget meetings” thus far to at least sort through our debt (about $40k spanning from student loans to credit cards to tax debt). But the kicker is that I feel like it is impossible to save up a month’s worth of income to begin the YNAB process. My husband just started another business and is not earning a salary yet. He picks up odd jobs in between and thank god I have a full time job. It seems that it would take forever to build up one month worth of income to begin this process and that is discouraging! Do you have any advice or suggestions?
You don’t have to have a month’s worth of income to start using YNAB or implementing their awesome methodology. Start by watching one of their free classes so that you really understand the four rules. Then only budget the money you have, which will mean you’ll be budgeting each time you have income. You will have to decide what that money needs to do before you get paid again. You can start setting a little bit of money adide each month after your basic needs are met. Little by little you will build up a month in reserve. If you have a tax refund or a bonus at work, that will speed it up. Definitely go watch the beginning free YNAB class to get you started.
I so must start doing this. Both YNAB and last month’s income.
Besides the day-to-day peace of mind, using YNAB and living on last month’s income has saved our tails more than once!
I’ve read a number of your blog posts and appreciate each one. 🙂 In fact, one of your older blog posts mentioned living off last month’s income, so I’ve been working on a budget that will allow us to do that, while getting out of debt. We’re 5 figures in. Today, we took a big step and opened up several accounts that will help us keep better track of our money. Eventually, we’ll add a couple more – for our daughters and for online shopping (that will be a luxury for sure!) Thank you so much for your transparency. It’s really encouraged and educated me as we seek to get out of debt in my household. 🙂
That’s awesome that your working to live on last month’s income. Especially while working hard to pay off debt, it’s nice to have the peace of mind that comes from living on last month’s income.
Ok, I followed your links and you helped me understand that the available to budget amount is the amount we have towards the living a month ahead plan or any overage. Thank you! I need to figure out how to zero out that top number now and keep all my other data. My category data is correct, the available to budget is incorrect. Is there a way to zero out available to budget without losing all other monthly data? Thanks again for your help!
Hi Laura, I think I understand what your’re asking, but if not, feel free to correct me.
When you enter income, you have a choice to make it available this month (Aug) or available next month (Sept). Any money that you make available next month will go to the top of next month’s column. If you want to make next month’s “available to budget” zero out, go into the transaction where you added the income and change the category to available in Aug. If you aren’t sure what transactions they were, go to the available to budget in Sept column and click on the number. It will show you what transactions are making up that particular month’s available to balance number.
Hope that helps!
I have been using YNAB and like it and have done the tutorials. I consider myself fairly intelligent but still have a hard time understanding the amounts YNAB creates on the top of the budget ledger page in the AVAILABLE to budget. It seems to be a random number to me and I can’t figure it out. The immediate top of the column does match the bank balance/spending but the larger top column just confuses me. Any help or insight?
I have been using YNAB for several months now, and I love it too! This is a really well written article explaining it. Good job!
You are making great progress on your debt repayment. Way to go!
That’s great Judy! Thanks for sharing your experience. And thanks for the encouragement!
Oh! I think I finally found it!!!
Can you get YNAB to show you the overall total debt you have? I can’t seem to figure out how to get that to show up in the trial version.
Hi Jill! When you enter credit cards into YNAB, the balance will show up as Pre-YNAB debt. The same should go for other debt. For us, we don’t actually have our student loans in YNAB. We keep track of our payments in YNAB, but don’t have the loans actually show up in YNAB. You can do whatever is easiest for you. Watching the videos will help too.
YAY another YNAB lover! I’ve been using it for a year and love it!
Hooray! That’s great Beth Anne!
I wasn’t sure about plunking down the $60 bucks for YNAB at first, but I did their 34 day free trial and was definitely convinced by the end of it. I also like that it makes it easy to start over, if you are still trying to figure out what works best for you and your financial situation.
We did the free trial first too. Spending $56 is a big deal for me too, but we have not looked back!
We’ve been using YNAB now for 18 months. Let me tell you the fun we have now on running reports, etc with a full year under our belt! Yahoo!
I know it take a few months to be fully up and running (there are always expenses that pop up and you need to decide if you lump it into one item like “misc” or break it out.) But it forces you to ALWAYS tell the truth.
The classes are absolutely fabulous and the forums are super helpful too. If you have a smart phone, you can put the YNAB app on there too! It’s funny, all my friends and I have it. So we go out to eat, pay the bill and pull out our phones to budget the meal!
Should have mentioned that we also have our full budget handy because it’s on our phone. We can check the budget BEFORE we spend. It’s like using the cash envelopes (as long as you look at it before you spend!)
Thanks for pointing this out! It is awesome to see your whole budget when you’re at the store trying to make a decision. We never “accidentally” go over budget. If we go over on something it’s because we chose to and re-allocated our money to different categories.
Yes! Forcing you to tell the truth by actually having to enter the transactions and categorize them. Back when we had Mint, if I didn’t know where to put something I just ignored it and considered it Misc. Now I make every transaction go into a category. All the spending is in the open.
The classes really are fabulous and really help you get started out right. The app for your phone makes it so convenient! That’s awesome that all of your friends are YNAB-ers too!
I’ve always been a spender and never a saver. The outcomes have been awful. No emergency fund. Attempts at planning my spending have failed until this year. I love it. Brilliant. I wish I’d thought about Living on Last Month’s Income years ago.
I’m glad that this year has been a great budgeting breakthrough for you Ramona! I wish we had started living on last month’s income years ago too. We would have been much more careful with our spending during the law school years (not that we were frivolous, we just didn’t keep track or budget very well). We can only more forward and make the future better than the past!
YAY! I have been so excited for this post! I love it so much. I am going to talk with the other half about YNAB for sure! Our spreadsheet works but YNAB seems more specific and easier to keep up with throughout the month. The cash system has been working well for us so far but the initial spreadsheet budget is key. Thank you for sharing about this! 🙂
That’s great that cash is working so well for you Bre! I think using YNAB makes budgeting fun (if that’s allowed)!
I’ve seen so many great posts about YNAB. We’re looking to take the plunge this month…I just can’t seem to get the time to go through with it. After reading all your posts I’m pretty sure we’re going to go exactly this route. Thanks again for the inspiration!
No problem Leslie. YNAB has really been so wonderful for us, that I can’t help but share it!
LOVE LOVE LOVE THIS!!! It definitely makes life easier when you’re living on last month’s income instead of relying on this month’s. I haven’t tried YNAB, but I may just need to because you always have such wonderful things to say about them. 🙂
Thanks Jessi! It’s true, I just can’t say enough good things about YNAB!
Stephanie
I am very interested in learning how to do this. I have a question (maybe the online videos will address this?) but how do you handle unexpected expenses? Do you just readjust your budget as the month goes on? How did you cover the $697 without running out of money by month end?
Thanks!
Lisa
Most normal, small-ish unexpected expenses you handle by changing the way you have allocated your money. For example, if there is killer deal that comes up on men’s suits (my husband really needs a new one), but we only have $25 allotted for clothes, we will have to take money from other categories if we decide that the suit purchase is a higher priority that other things in our budget. We could take $50 from grocery, and $10 from entertainment and so on, until we had enough to cover the purchase.
The way we are putting everything extra toward debt, we also have a category for our beginning of the month debt payment and our end of the month debt payment (more on that here). Most likely we would have enough in our end of the month payment category to cover the suit purchase if we thought it was a deal that we would have to act on now. If it wasn’t time-sensitive, we would plan it into next month’s budget. For people who aren’t doing a debt payoff like we are, the extra in the budget categories would either roll over to the next month’s categories (sink funds) and have growing balances OR the extra (money remaining after funding all your categories) would go toward savings.
When we have big, unexpected expenses like the one I mentioned in the post, we have a couple options. The withdrawl of $697 happened on the 21st, so it was too late to grab that much from other categories (like I talked about above). We had around $300 in our “end-of-the-month debt payment” category (usually it’s more, but as you’ll see in July’s debt repayment post next week, my husband had a root canal this month!), so that helps to offset the blow, since that was money that would be going to debt at the of the month anyway.
To cover the remaining $400, YNAB gives us two choices: 1) Subtract from next month’s “available-to-budget” or 2) Subtract from next month’s “category balance.” With option 1), the $400 would be taken out of our total amount that we have available to budget for August. Option 2) keeps the -$400 in the our debt category, so when we allot our next debt payment at the beginning of August (say $1000), it will cover the “overspending. Then we will just pay $600 toward debt and our category balance will be nice again. This is the option we chose. I like having everything taken care of cleanly at the category level so it’s easy to follow what happened. Neither of these options would be available if we weren’t living on last month’s income.
A third option is to use our emergency fund, but we try to reserve that for only if all other options won’t work. If we couldn’t correct the overspending in the month after the overspending occurred, we would use our emergency fund to “pay ourselves back” and stay living on last month’s income.
I hope that helps Lisa! I will give a (hopefully) clearer explanation (with screenshots) when I write about the incident in the coming weeks. The YNAB classes will address your question too.
The hubs and I are YNAB users and believers. We have been using it for about 5 months or so now and we are already living on last month’s income. Luckily, we easily had the money available to do so, but even if we didn’t we would have made it work.
Living on last month’s income is very important to us because I am a bartender so my income is variable/irregular. Generally it is in the same “range”, but you can’t count on making the same dollar figure one month to the next. YNAB has been the ONLY budgeting program, software, worksheet, or excel sheet that has worked for us with my income coming in daily. I cannot speak highly enough of this program!
I am always so happy to hear how well YNAB is working for you CeCee! Living on last month’s income is so perfect for variable/irregular income. It really would be hard to handle daily income otherwise. Thanks for sharing!
I have heard great things about YNAB. Is the $60 a one time fee or is it subscription based?
It’s a one-time cost. It really is wonderful! There is a 34-day free trial that you can download. You’ll want to watch some of the online classes so that you get the hang of it quickly and can make the most of your trial.
How do I get the $6 coupon off of the cost of the software? Thanks!
Julie, you just have to go through this link and it will take you to the page and automatically take $6 off YNAB.