Help Understanding how to Live on Last Month's Income

I have used YNAB almost 3 years now and it has worked wonders in my life, seriously.  But I have never followed it by the book.  I used it to pay down debt, fund our wedding, etc, but never used it to really follow Rule 4. I'm trying now to understand the concept of living on last month's income and when I will be there.  

Each month I budget in about $3,200.  But that includes more than just what is required that month.  It has things like what I want to add each month towards vacations, savings for my daughter to get braces, gift money, fun money, etc.  I have a balance of more than that and my "Age of Money" is 36 days, but I am not living on last month's income.  That money has other jobs that are important to me.

So, to be one month ahead, do I need $3,200 extra?  Or do I need the amount that is essential/required next month- the total I need for things like mortgage, phone bill, insurance premium, gas, groceries for one month? 

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  • Pretty sure the point is ease of budgeting. When you're able to flip to next month, budget everything all at once, and not need to add money into a budget month during that month, then you're living on last month's income. (Whack-a-mole notwithstanding, because moving money around in your categories is just rolling with the punches; you're not actually having to reach into income you've received this month to budget for something you need this month. Does that make sense?)

    Reply Like 3
  • The YNAB 4 "Rule 4 - Live on Last Month's Income" was a bit of a misnomer.  It was really about budgeting with last month's income. That is, the money you budget in January should be money that was earned in December.  (And the money you earn throughout January should be stored up and budgeted in February, and so on.)

    The main benefit of this workflow is administrative convenience. It allows you to budget in whole-month increments (just as you might do in more traditional forecast-style budget systems), as opposed to budgeting paycheck-to-paycheck. I'd argue that it's easier to see the big picture, make better plans, and make steady progress on goals when you budget in whole-month increments.

    The usefulness of this workflow will vary depending on your individual pay schedule. If you earn income weeekly or bi-weekly, or have multiple income streams in your household, combining all that money makes things really convenient.  But if you only get paid 1x per month, then you're effectively already budgeting in whole-month increments, so the workflow won't provide as much benefit to you.

    The financial benefit of living on last month's income is marginal and depends on your pay schedule. If you earn a lot of money toward the end of the month (e.g. paid on the 31st), then sending that money into the next month means its only being saved for 1 day.  On the other hand, if you earn most of your money at the beginning of the month, sending it ahead means you've got a 30 day "buffer".  But even 30 days is inadequate savings for most people; you should aim to have a lot more cushion in you budget than that!  (And that's where things like "Emergency Funds" come into the picture.)

    Hope that helps.

    Reply Like 6
      • dakinemaui
      • dakinemaui
      • 4 mths ago
      • 1
      • Reported - view

      bret Well said!

      Reply Like 1
  • bret said:
    The financial benefit of living on last month's income is marginal and depends on your pay schedule. If you earn a lot of money toward the end of the month (e.g. paid on the 31st), then sending that money into the next month means its only being saved for 1 day.  On the other hand, if you earn most of your money at the beginning of the month, sending it ahead means you've got a 30 day "buffer".  But even 30 days is inadequate savings for most people; you should aim to have a lot more cushion in you budget than that!  (And that's where things like "Emergency Funds" come into the picture.)

     This is the part that I find many newbies are struggling with. If they get paid at the end of the month, they get their knickers in a twist when people advise that moving the money into next month, even if it's just a few days, nevertheless constitutes being buffered. To be fair, this "always be 30 days ahead" is obviously what Jesse was after when he wanted AOM, but of course, AOM doesn't capture this very well, and 30 days ahead assumes regular, non-variable income, which is only the norm for some. And importantly, as you point out very well @bret,  the benefit of the time shift in terms of the cushion actually isn't all that big regardless of when you get paid; for most people it's somewhere between two and three weeks, not a month. You still need emergency funds, so there's not much benefit to using the December 31 paycheck to fund February above and beyond using it to fund January--the net is the same and all you've done is created another month of data entry and potential problems. 

    Reply Like 5
      • bret
      • bret
      • 4 mths ago
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      WordTenor 

      Agreed, the "Live on Last Month's Income" workflow isn't a great fit for everyone.  Hell, if your pay schedule is variable and you didn't earn any money in December, it's literally impossible for you to live on last month's income.

      The irony is that its replacement, "Age of Money", isn't really useful to anyone. And I'm still salty about that.

      (Yeah, I'm sure I'll take some heat for that. Someone will probably argue that AOM is good motivator for a beginning budgeter. But the big difference is that AOM is just a (flawed) reporting statistic; it's not an actionable budgeting strategy/workflow like "Live on Last Month's Income.")

      Reply Like 3
      • Kombucha Kid
      • Slate_Gray_Router.1
      • 4 mths ago
      • 4
      • Reported - view

      As someone with previously variable income, I'd say the concept is still very valuable. It means if you have an entire month without income, you don't have to freak out during that month. It's covered. When I had no pay in November I knew I didn't have to worry until December, because in November I was still living on October's income.

      Come December, I was of course no longer a month ahead, but having felt the relative security of the one month buffer I was determined to re-establish it. So I hustled my butt off and am back to being a month ahead. 

      I have a regular pay schedule now, but my partner does not, and he's just now beginning to see the value of living on last months income. While we know the buffer will fluctuate we are still striving to keep him a month ahead. Ideally our business would have a three month buffer so he can still get paid during downturns, but we're still working in that one. 

      Since this is my first month on a regular pay schedule, and I expect it to be light because of the datr I started my new job, I don't know if I'll be fully buffered for February. My final paycheck of the month will come in on the 26th. I get that in theory this means in not actually a full 31 days ahead. But from my vague understanding of how YNAB4 worked, all I'm really trying to do is create walled months - everything earned in January goes to February, regardless of when the last paydate in January occurs. My income replacement fund is designed to (eventually) cover anything after that.

      Reply Like 4
      • bret
      • bret
      • 4 mths ago
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      Kombucha Kid 

      The problem/limitation with YNAB 4's implementation of "Living on Last Month's Income" was that it was only optimized for the use-case of someone who earns regular income each month. The software only allowed you to assign income to "this month" or "next month".

      For example, if you earn quarterly income, you may want to spread that money evenly across three months, i.e. "this", "next", and "month after next".  YNAB4 doesn't provide an out-of-the-box solution for that, so users were forced to devise their own ways of handling it.

      One popular solution, which it sounds like you employ, is to simply pool those large/variable checks into a category (e.g. "Deferred Income") and then re-distribute a portion of that money each subsequent month. That workflow is pretty much the same whether you use YNAB4 or the new YNAB.

      The thing is, if you do fit the YNAB 4 optimal use-case (as many people do), the built-in mechanics were extremely convenient! It streamlined the process so that you didn't need to manage any "Deferred Income" category and you could see at-a-glance whether whether you've budgeted the correct amount each month. I miss those features. A lot.

      I was hoping the new YNAB would address the shortcomings of the previous version by offering more options for assigning income to specific months.  (Even just a third option, "month after next", could have benefited a lot of folks.)  Instead, they went a completely different direction and abolished the concept altogether. /weep.

      Reply Like 2
      • dakinemaui
      • dakinemaui
      • 4 mths ago
      • 1
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      bret I'd argue that being buffered benefits the variable income folks the most. Again, not having to budget with Every. Single. Income. Event is huge for them. Another benefit is advance notice and that means more options with which to deal with things. They would do well to use a Deferred Income approach to smooth out the fluctuations, however.

      Reply Like 1
      • bret
      • bret
      • 4 mths ago
      • Reported - view

      dakinemaui 

      Agree, but I'm speaking to the specifics of YNAB 4's "Income: Next Month" / "Available to Budget" mechanics, which work best for the regular (bi)-weekly income use case.

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      • dakinemaui
      • dakinemaui
      • 4 mths ago
      • Reported - view

      bret I think the Deferred Income category is the optimal approach to quarterly income or similar. Certainly better than budgeting several months in advance. Priorities change, categories get dropped/added, and bill amounts change, and having to change multiple copies of the budget several months in the future is wasted effort.

      I get that people wanted to go arbitrarily into the future, and that's what YNAB gave them. While good for YNAB (satisfying user demand), that doesn't mean it's necessarily a better workflow for users.

      Reply Like
  • At minimum, you need enough saved for actual outflows that occur between your first paycheck and the end of the month. You may, however, also want to include True Expense contributions which would obviously raise the amount required. If you don't include these TE contributions, you would have to compensate in the following months.

    Unless you're paid on the first of the month, it's very likely you would not need to save an amount equal to your entire monthly paycheck. Most people have bills (e.g., rent) early in the month before they are paid, and that amount would not be included in what you need. (You're already covering those bills from the previous month.)

    Doing it YNAB's recommended way of budgeting increasingly into next month naturally includes TE contributions, and everything is fairly "automatic". It works like this: if you have $500 that's not needed in Jan, then you can budget it into Feb's area. Now when Feb rolls around, you can again put the $500 that's not needed from your check into the March area. Additionally, the current month (Feb) is already ahead by $500, so you can send another $500 into March (total of $1000). Etc.

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  • One trick to accelerate getting ahead is to reallocate any generic Emergency Fund into next month. You can always pull it back if you needed to -- you obviously haven't spent it -- but until you do have an emergency, that money is more useful in next month's area.

    Reply Like 1
  • Kombucha Kid said:
    As someone with previously variable income, I'd say the concept is still very valuable.

     The classic concept is what you described and what is valuable. The new reformulation is watered down and misleading, because your money ages when you're staying even (making True Expense contributions) or even falling behind (increasing CC debt).

    If the new Rule 4 was "Budget Increasingly Ahead", it would be far more useful.

    Reply Like 2
  • I'm thrilled to say that we're finally in a position to sort of be accomplishing this.

    What has worked for me in the budget (I manage 3 budgets, one for myself, one for my small business, and one for my BF (which is actually more like an extreme game of whack-a-mole because he isn't fully on board yet)) is to go ahead and add funds to a category a month ahead.
    Here's our scenario: We refinanced the house this fall, which gave us 2 months of no payments (HOORAY EXTRA FUNDS!). That gave us money to work with in ways that we haven't ever been able to. So I have been adding extra money to the mortgage payment category. My BF gets paid every 2 weeks, so I divided the mortgage payment by 2 and made a note next to it of that amount so that I would know that each pay period I would need to move that much into the category.  So it says "Mortgage - $816.00" or whatever the exact number is. Because we are now a month ahead (living on last month's income) right before the payment comes out there is over $3000 sitting in that category. When the payment comes out, it drops back down to the single payment amount (like $1685 or whatever it is). So there's always a full payment in the category, and then very briefly 2 payments, and then it goes back down to the one full payment again.
    I'm doing something similar with our car insurance payments. Due to the refinance we were able to pay the car insurance in one lump sum instead of payments over 6 months. It saved a chunk of change, which made me happy! So now, each pay period, I put a set amount of funds into that category, in prep for the next bill at the end of the 6 months. So I just keep adding to it. That is enabling us to effectively this month's bills with last month's money. My goal is to be able to get a month ahead on all of the payments that are reoccurring. It's a slow process, and he's over spent in categories since then, but I just let that sit on the credit card rather than disrupt our buffer of the cash we have in hand. It works for us. (or me, since he doesn't really look at it....)
    I also break up other payments in my budget so that I am ahead. I've had a couple of small windfalls that have allowed me to budget for the interest that I'm accruing on my credit card debt. That's been nice to be able to put that money into the Interest category right after the payment is made on the card, and know that it's covered until I pay the bill again next month.
    It's been a long slow road to get here, but we're here. I'm grateful for the couple of blessings that we've gotten that have helped us get here. The good news about the car insurance buffer is that if something major happened, and we needed the cash, we could always go back to paying it monthly the next time it renews. I don't think we'll need to worry about that, but it's a comforting thought to know that there is extra there.

    Long winded answer, but I hope it helps to show another option of ways to play with your dollars :)

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