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.

Shout it from the Rooftops!

Last month, I paid off my Lending Club loan. This means I am debt free, minus my mortgage, (but that mortgage was the best purchase ever!) But when you can say the words debt free, you should shout it from the rooftops! You should do a happy dance; post it on social media; throw a party; even put a sign in your front yard if you want! I thought about putting a flag up. Wouldn’t that be something? Driving down the road and see a flag flying in someone’s yard that says “Debt free”? Now there are some that would say, “You’re not really debt free, you still have a mortgage”, but they are party poopers and they aren’t invited to my party. Currently I have a plan for that pesky mortgage too. I have a mortgage with a nice fixed rate, a very low payment and a bazillion years before I pay it off. It’s the standard, run of the mill, every American has one loan, but my mortgage company is awesome! I use Quicken loans and they rock! Some mortgage companies penalize you for paying your mortgage off faster, but not them. No sir! They want to help you help them get paid. They just started offering the bi-weekly payment plan, which if you know me, you know I love bi-weekly payments. That is how I paid off both of my vehicles early and saved tons on interest. So instead of paying 12 payments a year, you actually pay 26 half payments, which is like paying an extra payment a year. Quicken has this cool like amortization calculator where you can crunch your numbers and see how much interest you’ll save on your loan and how many years you knock off. So this is something I have learned playing with my numbers. Since I am use to living without my lending club loan payment, I can actually put it toward my mortgage. If I do that, I will pay my home off in ten years and save a little over $50,000 in interest. That’s amazing! My mom once told me to never give people real money. She said, you don’t know if you’ll still be living there in 30 years, so why give them any more on the loan than what you have to? Well, I’ve got to live somewhere, and how’s this for a kicker – if I pay my mortgage off in ten years and then I have to move in 11 years, I can sell my house and buy my next house with cash, or even get a bigger house with a HUGE down payment, like 50 or 80% down payment. So while my mom has a point with her advice, I like my idea better. It is true what they say, your world opens up without any debt. Or if “they” don’t say that, I said it and it’s true!

Dear Self: Things I wish I Could Tell My Younger Self About Money

How many times have you thought, “If I could only go back in time”? What were some of the things you would have done differently? (Well, besides dating the guy/gal your parents warned you about) I think about it and I think if I had to write myself a letter about my financial future, it would go something like this:

Dear Self,

I am writing you today to make sure you don’t make the same financial mistakes I made. First, In 2000, when standing on the concourse, do not sign up for a credit card just to get a free t-shirt.

Second, learn to balance a check book and cut up the first debit card you get. It’s a gateway card to credit cards, which can be just as detrimental to your life. Online banking is great, but don’t count on the balance telling you how much money you have, that’s what your check book balance is for!

When you close your first checking account to go to another bank, remember to actually close your first checking account. They charge you $5 a month. When you leave that bank, you have $200 in that account. When it shows up as a charge-off on your credit report, you have negative $70. Remember to cash checks when you get them so they don’t expire in 90 days and you lose out on unclaimed money!

When you get your first “big-girl” job and you are holding your pay checks for a month before you cash them, don’t. Cash those suckers and start saving some interest on that unused money while the interest rate at the bank is still above 5%, it won’t be that way two years from then. In 2002, when you see that shiny new Dodge Ram sitting in the parking lot, don’t buy it. Your salary that year is going to be $19,800. The truck costs you $19,000. When you get those $379 a month payments, you’ll only have $32 a month after bills to live off of, including your gas and food. Drive the paid-for explorer your parents bought you until the wheels fall off, then go buy a used car with cash!

When you get back that HUGE tax refund check, save it. Don’t go out to eat three meals a day and blow it. You’re throwing away really great money!

Remember the store credit card you got about that time with the $250 limit that you charged up and then paid $50 a month on for the next¬† six and a half months before you did it again? Don’t do that! The APR was almost 30%, you could have saved the $50 cash for 5 months, made some interest off of it, then went and bought yourself new clothes, instead you paid someone else an extra $75.

Let me save some time, don’t use a credit card, not a single credit card. I don’t care if you need tires or diapers, don’t charge a single penny to a credit card. Don’t charge a single penny to start a business on a credit card either! PS, while they are good for some people, you can’t do a part time business and a full time job, it just doesn’t work, just don’t even do it. If a bank thinks the business is worthy, they will loan you the money at a much lower interest rate.

In 2003, you’re going to tell your husband you want to buy some land in the county and he’s not going to want to. Buy the land anyway! In five years, the land is going to be work quadruple what you’ll pay for it.

You’re also fixing to have a baby and you’re going to quit working for a year. Do NOT remove your retirement! You’ll go back to the same job and have to work there another five years to make it up.

In 2004 when you want to go back to school for another degree, don’t. Wait until your son is older, you just can’t juggle a full time job, a baby and school, also, if you decide later to go back to school, choose business, not accounting, you don’t like the morals, or lack there-of of a lot of people you’ll come into contact with. PS, that’s another $3200 your going to throw down the drain, instead, take that $3,200 and pay for a new used car, the explorer you’re still driving (I hope) is probably on its last wheel by now.

This same year your grandmother is going to offer to put a down-payment on a nice brick home on the same street you live on now without her help. Take it! Take her up on the offer, she won’t be here to help you if you wait. When she sends you a large monetary gift a year later, take half of it and save it, use the other half to go see her every chance you get. PS, call her every day and get every piece of investing advice you can from her, the woman is a monetary genius! When she sends you coupons, use them and the $25 for groceries she sends too. Now take that same money you just saved and put it with the other money from her you are saving.

When you want to invest in any money-making schemes and warehouse shoppers clubs, don’t. That will save you thousands over the years. You’re a sucker for anything that might make or save your family some money, simple is best and high risk investments fail. When in doubt, investment wise, don’t.

In 2009, the economy is going to really tank, do not try to start a business during this time, it’s just not going to work. Just stick to simple saving and your full-time jobs. PS, your husband will have a second job that’s just frosting money. Save every penny of it!

Stop eating out so much! Learn to dumb down that sophisticated pallet. It’s killing your pocket book! Use coupons every time you shop. This could save you hundreds of dollars at the store. Stop robbing your savings account to keep your checking account afloat. Just account for every dollar and you won’t ever have to worry about your account going in the negative.

When YNAB comes out, get it! Don’t waste your money on any other finance software, they’re overly expensive and you won’t stick with them because they are complicated and take up too much of your time.

If you will do all the things I have warned you against, you will have saved yourself on the low end, drum roll, $262,050 without interest and that’s on the low end. A house and two cars, paid for, debt free, plus another $125K towards retirement. I also will have saved you countless hours worrying about every dime and more free and happy time with your family and time to do things you enjoy to do.

Sincerely,

 

You 15 years older

 

What would your letter say?