The Budgeting Buffer

Kinda like that

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.

Conclusion

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?

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24 Comments

  1. Posted April 4, 2012 at 4:30 am | Permalink

    I’ve never been crazy about budgets, they kind of remind me of diets. I can see where the buffer could be useful though. Although I don’t use a budget, I track like a madman and that has helped me keep my spending in check. Seeing the average numbers allows me to gain a fairly good idea of what my expenses will be for each month. I use that average as my baseline and know if I’m getting too far above it.

    Thanks for sharing :-)
    The Stoic recently posted..March 2012: A Look In The Rear View MirrorMy Profile

    • Dollar D
      Posted April 4, 2012 at 8:39 am | Permalink

      Haha, “Budget” is almost a 4-letter word in our culture, just like “diet”, except that latter is actually a 4-letter word :)
      Although, it sounds to me like you *are* budgeting. Tracking like a madman is the same thing as budgeting to me, except I usually try to set goals for myself at the beginning of the month. The important thing is that your budget should never be a source of guilt. Guilt is a useless emotion!

  2. Posted April 4, 2012 at 7:56 am | Permalink

    I’m a huge budget nerd personally and I’m a Dave Ramsey coach…so my enthusiasm for budgeting tops most.

    We operate with a “buffer” in a sense – I never wait until the due date to pay bills as I generally pay them the day I get the bill. Along with this, when we “close out” a month’s budget, we use some of the money from the previous month and “roll it over” into our next month’s budget. This allows us to be a few weeks ahead on all of our bills and would give us some extra time to rummage up some cash if we ever ran into an issue.
    WorkSaveLive recently posted..Recipe: Creamy Avocado PastaMy Profile

    • Dollar D
      Posted April 4, 2012 at 8:41 am | Permalink

      Sounds like you’ve got a good system and a buffer of your own! Really, it can be any size as long as you have a decent cushion to avoid living paycheck to paycheck.
      I like have a full month’s buffer because I get a big rush from transferring a month’s worth of investing money over to our business account. :)

  3. Posted April 4, 2012 at 3:54 pm | Permalink

    I do something quite similar to this! At the end of March, I had a final number for my April spending plan (somewhere around $3,600) and with a net paycheck of say $4,700, I had $1,100 leftover for saving. $165 went to replenishing my health insurance deductible reserves, $250 to my vehicle replacement fund, and $685 to my condo down payment fund. Then what is leftover in my checking account is for my April spending plan.

    I also double-check the amount of money left in my checking account at the end of the month and whatever is “extra” (e.g. food and entertainment budget amounts that weren’t used up) gets sent to savings as well!

    I absolutely love just paying my bills as they arrive! Growing up, my parents always paid the credit card bill just before the due date, even though they paid it off every month. Personally, I pay even credit card bills as soon as they show up. Holding onto that money for an extra week or two wouldn’t earn me much more interest.
    Leigh recently posted..How I Made My Spending PlanMy Profile

    • Dollar D
      Posted April 5, 2012 at 8:21 am | Permalink

      Sounds like you’ve got a great system that works for you! I hope there’s some retirement savings in there too :)
      Waiting until the last minute is absolutely *not* worth it, in my opinion. It’s too easy to forget and the reward is too small to take on that kind of risk. My finances run a lot smoother when everything is just taken care of, without me having to remember to do anything :)

      • Posted April 5, 2012 at 10:22 am | Permalink

        I am maxing out my 401(k) and getting the full match from my employer :D (That’s taken off before the $4,700 number.) And I also invest 20% of all of my bonuses towards retirement, whether that is in a Roth IRA or in a taxable account.
        Leigh recently posted..How I Made My Spending PlanMy Profile

  4. Posted April 4, 2012 at 7:05 pm | Permalink

    I don’t really budget. I just know how much money is coming in and how much is coming out, I know how much I put towards savings, and live on the rest. Simple. Does it always work, no. I tried to budget before and it was way too time consuming with all this tracking and calculating, and going over. :))) Now it is much easier.
    Aloysa @ My Broken C recently posted..Dealing with Wants: How I failed my No-Buy ChallengeMy Profile

    • Dollar D
      Posted April 5, 2012 at 8:23 am | Permalink

      They say that what you track you can improve. It takes a while once you start out but when you get a system that works, it goes a lot quicker. Before I started tracking everything, I couldn’t really tell if I was making progress on my goals or not. But it’s definitely much easier *not* to do something than it is to do something :)

  5. Posted April 4, 2012 at 11:49 pm | Permalink

    Hi Dollar D,
    That’s an interesting trick! I remember doing something similar a few years back when I was thinking clearly. It was only for a few months, then I was back to my old ways but I still remember the feeling of freedom and peace of not having to spend my paycheck before even receiving it.
    I think I’d like to try it again once I have my emergency fund in place.
    Theresa Torres recently posted..How to Build Credit for StudentsMy Profile

    • Dollar D
      Posted April 5, 2012 at 8:24 am | Permalink

      While you build up your buffer, it can act as your emergency fund so you don’t have to wait. When it’s complete, the money you were putting towards your buffer can go towards emergencies. That way you can enjoy the benefits sooner :)

  6. Posted April 5, 2012 at 4:35 am | Permalink

    Our family has a set spending limit for each month and we try our best to be below always at that limit. We track and record all our expenses in Google docs so we can view and edit it anywhere.
    Financial Management recently posted..Six Ways to Learn Financial EducationMy Profile

    • Dollar D
      Posted April 5, 2012 at 8:25 am | Permalink

      I *love* google docs. Our family, and businesses, run on google docs! It’s great because Mrs Dollar and I can collaborate on the budget and other documents no matter where we are!

  7. Posted April 5, 2012 at 6:05 am | Permalink

    I’m with Mr. Stoic on budgets, and diets. don’t like ‘em, but I can see their usefulness. if you find them useful this buffer idea makes great sense.

    We’ve never had a budget. We’ve always just (very aggressively) “paid ourselves first” and spent what’s left.

    This way I can avoid budgets and still get to where I want to go.

    Now, if only I could avoid diets and get where I want to go. :)
    jlcollinsnh recently posted..Where in the world are you?My Profile

    • Dollar D
      Posted April 5, 2012 at 8:27 am | Permalink

      Some people have more discipline I guess :)
      I am not one of those people. Plus, I flat out *like* tracking our finances. It gives me nerdy joy!

      Regarding diets, you should look into the Paleo diet. It’s more like a way of eating, rather than a traditional diet. I love it because I can literally stuff myself to the rafters with yummy food as long as it’s the right kind of food: lean meat, fruits and veggies, nuts and seeds. No bread or dairy. If you can tolerate that, you can lose weight and still eat your fill :)

  8. Posted April 5, 2012 at 8:17 am | Permalink

    I have a budget and I like budgeting, but I know I’m a little weird;-) I move money within the budget from month to month and as long as I don’t go over that amount I’m fine with however I spend (some months I splurge, other months I cut back). I also practice the “pay yourself first” principle and it’s been very effective so far in helping me save.
    Kari @ SBBD recently posted..Dear HR, Where’s my 403(b)?My Profile

    • Dollar D
      Posted April 5, 2012 at 8:30 am | Permalink

      We can be weird together :)
      We also roll any surplus (or deficit) into the next month. So if we go over this month, we’ll have less to budget with next month. This can help correct those months of unexpected surprises.
      Paying myself first is one of my favorite activities!

  9. Posted April 5, 2012 at 11:25 am | Permalink

    I work the opposite way, I set an automatic money movement from my checking account into my savings. I live on the rest and don’t touch the savings. I typically don’t spend all of the money I leave in checking, allowing it to build up over time. That way when I do have a large expense or want to do a home improvement project I already have the funds in checking, essentially giving myself permission to go ahead and spend the money.

    Good work on the formating. Nailed it.

    I work full time as a financial advisor and I’m taking night courses for accounting. So I didn’t have a chance to follow up with you to provide a screen shot.

    • Dollar D
      Posted April 5, 2012 at 11:35 am | Permalink

      Very similar, you’re right: the opposite direction.

      BTW, thanks for the heads up about the layout.
      I’m kind of ashamed actually since I’m a web developer and that was a really stupid mistake (ignoring IE 7)!

      • Posted April 5, 2012 at 1:01 pm | Permalink

        I would like to ignore IE7. However, compliance won’t allow us to install anything. Including a better browser.

        • Dollar D
          Posted April 5, 2012 at 1:06 pm | Permalink

          Which is exactly why I’m stuck supporting it, both freelance AND at my dayjob. I’m lucky we were able to drop IE6 support. That’s a nightmare!

  10. Posted April 5, 2012 at 2:00 pm | Permalink

    I don’t keep a budget either. I keep careful track of the income and expense, but I don’t budget $400 toward groceries or anything like that.
    We do have a couple of months buffer in the saving account.
    retirebyforty recently posted..Socially Responsible InvestingMy Profile

  11. Posted April 5, 2012 at 2:04 pm | Permalink

    I love The Buffer concept. It’s not such a revolutionary idea to have a month’s worth of income in your savings. However, it’s likely that many people don’t know about it. It’s worked wonders for me over the years, and I still love using it.

    Even if you don’t like budgeting (as lots of people don’t), using The Buffer can make budgeting an enjoyable savings task, and can even inspire you to be a little more creative in your savings strategy.
    Anthony Thompson recently posted..Self Management – Classic Self-Management Books You Should Start Reading TodayMy Profile

  12. Posted April 9, 2012 at 8:27 pm | Permalink

    I’ve tried to use a budget, but not consistently. I watch what we spend and always put money in savings. I like the plan though and I think I’ll give it a try.
    Charlotte@Everything recently posted..4 Creative Ways to Make MoneyMy Profile

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