A lot of people don’t budget but personally, I enjoy the activity. Maybe it’s because I’m an engineer. Maybe it’s because I like seeing the pretty graphs I can generate with my custom spreadsheet. Maybe I should have been an accountant.
Actually, not that last one, because then I wouldn’t have met my fabulous wife in Computer Architecture class.
But seriously, for me, budgeting is like a game, and like any good game, there are all kinds of tricks to make it easier – and more fun! Today, I’m going to share my favorite trick: The Buffer. But first, here’s what your budget might look like without the buffer.
The Typical Budget
At the beginning of the month, you estimate how much money you are going to make based on what you made last month. If you earn a steady paycheck, then this part is easy since you know exactly how much you will make. But if you’re a freelancer or someone who gets paid hourly, this can get you in to trouble since you might not know for sure. You might just pick last month’s number or average the last few months and move on.
Take a look at what you spent last month on each category and use that as this month’s target. Hopefully, you take a few minutes to figure out if there will be any abnormal expenses. Maybe some extra get-togethers with friends you already have planned or maybe your car registration is due. If you’re a team player and you have have partner, you might even consult them and get their input, too. Life is a team sport, after all.
After that you might decide how much (or if) you want to put aside some money for later, you know: to have some for emergencies or to buy back your freedom. But you might not be able to transfer the funds now.
If you are doing this at the beginning of the month, the only cash in your checking account is likely the paycheck you got at the end of the month. You might keep a few hundred or thousand extra but you’ll probably have to wait a few weeks since your bills are due soon. So you put it off.
The end of the month rolls around and lo and behold: you spent a bit more than you intended to. I don’t know about you but this always seems to happen to me. Something I hadn’t planned for comes up and that money has to come from somewhere. And since the only categories left unfunded are savings and investing, that’s usually where it ends up coming from.
The method could be summed up as the “Pay yourself with whatever’s left plan.”
Introducing The Buffer
I can’t take credit for this concept as I actually discovered it from reading the web page of the popular budgeting software You Need a Budget. While I’ve never used the software, it looks downright fancy and The Buffer is an extremely powerful technique which the software helps you to implement.
The Buffer is actually really simple: instead of budgeting based on the money you will make this month, budget based on what you made last month. The trick is to keep a month’s worth of paychecks in your checking account so that you don’t have to dip into the money you earn until the following month.
How about an example? Let’s say you get paid on the 15th and 30th of the month. In the typical system, you’d start the month with the paycheck you got on the 30th, plus whatever was left over. But using The Buffer, you’d start with a month’s worth of paychecks. As the bills come in, you pay them with last month’s money (the buffer) and as the paychecks come in, you leave them there for next month, to replenish the buffer. At the beginning of next month, you still have a month’s worth of paychecks in your account and you start the process over.
The buffer provides a multitude of benefits:
- Forget about guessing. You will already do that enough with your expenses. Budgeting is a lot easier, and more accurate, if you can nail down the most important number of all: your income. If you earn irregular income, this is even more powerful since you can see the lean months coming and plan accordingly.
- No need to time your bills. Just pay them when they arrive. You know the money is there so you will never have to stress about it. Save even more time and use auto-debit! I haven’t written a check in a long time.
- Check your accuracy. If your budget is accurate, then the balance of your checking account at the end of the month should exactly equal the amount you made during the month.
- My favorite: Pay yourself first! Transfer your savings and investment money at the beginning of the month to get the most important budget category funded before you pay your bills. My favorite day of the month is the 1st when I get to transfer a big chunk of change all at once to our real estate business.
This is a fantastic system and it really makes the whole budgeting process a lot easier. The only hitch with using a buffer is getting it started.
For us, it was easy: we had the money in our emergency fund so we just transferred enough to set it up and we were good to go from then on.
If you aren’t in this situation then you have to build it up over time. If you’re already contributing to an emergency fund, then you can simply leave that money in your checking account and let it build up as the months go by. Eventually, you’ll reach that golden moment where you can start spending yesterday’s dollars instead of the ones you haven’t earned yet.
If you don’t have an emergency fund, then I’d seriously recommend starting one. I don’t have an article on the subject but there’s probably a billion of them on the internet, written by smarter people than myself.
So there you have it: one simple yet powerful trick which can make budgeting a lot easier. You’re already dealing with a lot of uncertainty on the expense side of the equation. Using the buffer can turn the most important variable, your income, into a fixed target to create your budget against. But more importantly, it gives you peace of mind.
Now, that is powerful.
Photo by 401k
How about y’all? Are you using a buffer? Do you plan to?