The Importance of a Buffer

age of money
YNAB ages your dollars, basically it is rate of spending vs. rate of deposit. Read more here.

Are you living paycheck to paycheck? I’d say many people do in an American society of debt overload and over indulgence do. We just weren’t raised to be savers. We look at our grandparents and great grandparents who still cut the bruised parts of fruit out and finish eating the rest and shake our heads. We think, “I will buy you a whole basket of peaches if you’ll just NOT EAT THAT!” We throw out vacuums when the belt breaks, think buying a brand new car on loan is cheaper than fixing the one that’s paid for and go pick up a burger at the local fast food joint when we just don’t want to cook. But saving is important, and over indulgence has entire generations in financial ruin. That’s why it’s important to create a buffer.

A buffer is a category you create in your budget; it’s rule four for my favorite budgeting software, YNAB. It’s different than saving for rainy day expenses, those expenses that only come up annually, or on an as-needed basis, like doctor visits and vet bills (which you should be planning for them as well!) It’s the one to six month’s salary you save so you are no longer living paycheck to paycheck, and you add to it each and every paycheck. It can be a small amount, or it can be large, It’s totally possible and most people can raise a one month’s salary buffer within 6-9 months of budgeting.

The question is, why is it so important? There are many reasons why you want to have a buffer, number one being a little thing called Murphy’s Law, which the financial guru Dave Ramsey suggests always happens where money is concerned. Murphy’s Law is an old adage, “Anything that can go wrong will go wrong”.  What if you get fired, hurt, sick, there’s a death in the family, you have to have hip replacement, your car catches fire, your house catches fire, you hit someone with your car, and so on and so on. There are so many reasons to have that extra money handy, just in case those paychecks stop rolling in.

How much do you want to save in your buffer? Start with one and keep adding to it, you can never have too much “just in case” money. When I started using YNAB, I usually had about $30 on payday, debt, no savings, no investments, nothing. Now, three years later, we are debt free (minus our mortgage), we have an ever-growing, fully funded buffer , a separate emergency fund of $1000 and still manage to save for our 52 week savings plan. We did remove all but about $200 of our investments from Lending Club and Betterment and just put it in to savings and CD ladders. We still have the $200 because they were notes that wouldn’t sell on Lending Club so they’ll just sit there til they pay out, (one of my issues with Lending Club).

Where do you want to keep your buffer? You can keep it right in your checking account, along with your rainy day funds and your every day expenses funds.You can also consider moving it to a savings account, simply to earn a higher interest rate off of it. Either way, you want to have it tangible if you need it. YNABers aren’t usually fans of lots of accounts, it can get messy and confusing, but I am also not a fan of putting all my eggs into one basket, especially in this day with identity theft and debit card thieves out there. Basically, it’s your money, put it where you want it.

BONUS THOUGHT: You know those people who say you shouldn’t save while you still have debt? Well, I think they are wrong, especially in this particular circumstance. You may have a problem come up way before you will be out of debt, and if you need to choose between adding an extra $10 to your credit card payment and adding an extra $10 to your buffer, until it’s funded with at least a month’s worth of wages, I would choose the buffer.

Advertisements

How to Take Extreme Measures Against Debt

Debt is a cancer-cut it off.

Declare War on Debt
Declare War on Debt

Taking extreme measures against debt is one of the keys to financial success. Without debt, you can save and invest for sinking funds, college savings, retirement, or just that once in a lifetime vacation that you could not afford otherwise.

The first measure is to declare that debt is not a tool. Debt is not going to bring you riches beyond your wildest dreams. The person who says you have to spend money to make money has money to spend. The every day individual with a car payment, ten to twenty five thousand dollars in debt, and a mortgage cannot afford to use debt as a tool.

Next, pay what you can plus a little more. Get debt out from under you. If you can comfortably pay $300 a month on your debt but have an extra $150 a month that you blow on frivolous things, put it toward your debt. The faster you get away from debt the better off you are. It only takes one extra loan to wipe you out financially for the next ten years. Really consider what you can afford and don’t think that just because you pay on time that you are at the top of the game.

Since the new credit card bill came into effect just this month, credit card companies are already starting to penalize the ritual payees. The companies have been restricted to penalties and fees of late payers and over chargers. If you are a ritual payee, who pays every month on time, more than minimum payments, who never goes over the limit, you are no longer going to reap the benefits. Companies are going to have to make up these payment losses. Annual fees, loss of rewards, and high interest rates are already on the rise. The faster you declare war on the credit card companies, the better off you will be. Pay everything you can, sell stuff on eBay or amazon, have garage sales, and maybe get a part time job. Every cent you have to spare needs to go to paying these companies off.

If you are on the verge of financial despair, even more extreme measures may be needed. There are prioritized payments you will have to make. Dave Ramsey calls it the “four walls”. This means mortgage, utilities such as power and water, food, clothes. These need to be paid first. You should never let your mortgage go to pay for your car or your credit cards. You cannot live in a plastic card. Prioritize these items and send IN WRITING to your credit companies the following: a letter stating your plan,( i.e., I will pay you this much every month an only this much, I will talk to you on Tuesdays at 5:30 every week and will take no other phone calls from your company, etc.), Send them a “Pro-Rata” sheet, This is a written plan showing your debts, the payoff the percentage of your money they are getting, disposable income and how much you can afford to pay them afterwards. You can find a sheet like this at www.daveramsey.com. Stick to this plan. Do not be harassed everyday by these companies. If they call when not stated in your letter, hang up. Show these companies you are in control, they may moan and groan, but you are doing what you can.

 Side Note: Should you consider bankruptcy?  It is never something to be recommended just to pay off your debts. It is not the answer and the rules have changed. There are still debts to be paid with bankruptcy. Consult a financial planner before you consider this. Let them help you find your way back.

The last measure is to declare that you will never fall back into debt again. Declare to yourself that you will no longer be a victim of your own stupidity. Begin sinking funds, allocating cash in hand to emergency funds and repairs. Never again declare Christmas as an emergency to be put on credit cards again. Save during the year for Christmas or buy gifts throughout the year and put them back. Never again say to yourself it is OK to use the card if you pay the balance off next month. Never again even put the card in your wallet. Cut them up, freeze them, put them in a safety deposit box, whatever you must do to not use them. Buy cheaper cars that you can pay cash for or sell your car and take the bus. Scream out loud that you will do the most extreme and outrageous things to never again be close to foreclosure vs. starvation.

So, how do you get out of debt? Pay, pay, pay. Do what must be done! Declare war on the creditors; declare war on debt. Stop using credit as a tool.  It is a growth, a virus – a cancer; cut it off.

Read more about eliminating debt at http://www.daveramsey.com