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.

Beware Deferment Ploys

How many of you pay extra on your home or car payments? There is a little trick you can do to make your principal go down, pay every two weeks. You will need to check with your loan company and make sure they do not penalize you for this (if they do, consider refinancing with another company, its your loan, pay it when you want and how much you want).  If you are paid on a bi-weekly basis, you can pay half your payment every two weeks. Because you will get paid two to three extra paychecks a year, you will get ahead on your payments. Your interest rate will go down and, if you are in a crunch, you can pay a little less for one month. But because these companies make their profit off your interest rate, they will try a scheme to get you back on track, the deferment plan.

A deferment plan is when you can skip a payment for one month. The catch is, they don’t skip the payment, they just tack it on to the end of your account, so it’s just like pushing it back. They do this also because they don’t want you paying extra. If it saves you money, it costs them money. Instead, if you are low and your payment allows you, only pay a portion of what is due. This may sound confusing.

Right now, my car payment is $324 dollars a month. (I know, that’s high!) I pay $200 every 2 weeks, which means I am paying $400 a month. Which means my interest rate is covered, and my principal is going down fast. (This still works if I split my required payment in half and did not pay the extra $76 dollars a month.) Because of the extra payments, the loan company’s computer calculates my next payment due three months from now to get me back on track with their original pay schedule. Because of this, they keep sending me deferral notices so that I don’t pay for a month and I get closer to their pay schedule and they can still get the interest payment that will accrue because my principal payment will remain the same instead of going down. If I am a little short on money, I can afford to pay $100 every 2 weeks for a month. That will leave me $200 that month to use. I am still paying on the principal on my loan, just not as much as I usually do. But because I am so far ahead, it doesn’t hurt me in the long run. This isn’t something I could continue to do, but if I was in a crunch, it is manageable. Also, if something really bad happened, I could not pay until the next due date, three months from now. I would get to defer my payments, without them reaping any benefits.

If I continue to pay like I do, and I do not get into a crunch (because I have budgeted and because I have an emergency fund), I can pay my car off a year earlier than scheduled, and save myself hundreds to thousands in interest. This can work the same way with your mortgage.

No matter your situation, whether you are in a money crunch, or whether you are smooth sailing, it is always best to avoid deferments. It looks better on your credit, and you will be done with your debt sooner without them. With extra payments, you allow yourself the buffer you may need without hurting your credit.

20 Tips on How to Succeed on Your Path to Financial Freedom

Be a powerful force in your own life and know that only you have the key to financial freedom.

We each struggle, through good and bad times, on how to stay afloat with our finances from knowing what to do with money when we have it, to trying to find it when we don’t. Here are some tips on what we can do to make sure we succeed. Some of these tips are similar in thought but are important to say out loud to yourself, even if underneath they have the same meaning.

  1. Declare to have a clear direction- Declare that you will follow a certain path of success and stick to it.
  2. Keep a strong will- A strong will is crucial to following that direction.
  3. Keep self-control and discipline- Along with your strong will, keep self-control in your spending and discipline yourself to follow your path.
  4. Keep a positive outlook- With a positive outlook on life, you are sure to succeed. If you do not it won’t make a difference because you’ll still be happy.
  5. Declare that what you put your hands on will succeed- Declare that you will succeed, never give up and your deeds will prosper.
  6. Reprogram your way of thinking- Sometimes we need to “reboot” our brains and begin thinking another way. If we have been a spender, we must reprogram to be a saver and if we are negative, we must reprogram to be positive and strong willed.
  7. Discover the power of your words- Saying declarations of success out loud can unleash a power inside you never knew you had. It can also help others to realize your potential and hands will reach out to you to help you succeed.
  8. Sit Still- Sometimes the best financial plan is to do nothing at all. When you are torn on a financial decision, simply do nothing and the answer will eventually reveal itself to you by necessity or circumstance.
  9. Be happy with what you can control- If your finances have gotten so out of whack that you feel despair, be happy with the things you can control and focus on them first. Leave what is out of your hands out of your hands and you will find your way.
  10. You cannot receive if your hand is closed- Even in the roughest financial times, finding ways to give to others will open doors for you to receive. There is always ways to give, even if it is by helping someone. Not all giving must be fiscal. Kind words and actions will allow good things to happen.
  11. Enlarge your vision- Along with a powerful way of thinking, if you enlarge your vision to include future goals and reach for those goals, your path may lead you to the larger picture.
  12. Choose to be happy- Along with positive thinking, being a happy person makes financial troubles seem menial. Focus on the important things of life like family and friends and be happy about them. If someone else is prospering, be happy for them.
  13. Give thanks to what you accomplish- Thanking others that have helped you find your way can lift their spirits and your own. If no one has helped you, be thankful that you did it on your own, you have had accomplishments, no matter how big or small.
  14. Prepare for the unexpected- When times are good you must prepare for the unexpected by saving and planning. When times are bad, prepare for worse times and prepare for better times. Don’t let any change in your finances be a shock to your psyche.
  15. Organize your thoughts- Being organized  is a very important step in seeing it through. Starting with smaller goals and working your way to the bigger ones or shooting for the moon in the first place, know where you are going and organize how you will get there.
  16. Realize you are either coming or going from a storm- In life there are two realizations. We are either coming from a storm or going to one. Once you are out of a storm, you are headed towards another one eventually. The realization of this helps you better prepare for the future.
  17. Do not worry- This is easier said than, done but worrying about the troubles that are at hand can put a stand still to pulling yourself out of the muck. Just declare to yourself that you will find your way back to the top.
  18. Do not be afraid to ask for help- When you are really struggling and you feel you are at your wits end, don’t be afraid to reach for a hand. Go to your church, your friends and family, or to the government. If you are ashamed to ask for hand outs, as for advice. Many times you will find help where you least expect it.
  19. Be educated- When faced with a challenge, educate yourself on your choices. Go to the library, look for free classes, whatever you need to do to make a sound decision is worth the extra time.
  20. Praise your successes- When you have successes, it is OK to give yourself praise for your choices. Good choices help you change your thought process to positive and a healthy self esteem will help you have a healthy plan.

Take these tips and declare them outloud. Write down your goals and know that you will succeed. It may not mean that you will ever be rich; the success lies within your happiness. Be a powerful force in your own life and know that only you have the key to financial freedom.

Some ideas were taken from Joel Osteen’s “Your Best Life Now”. To read more you can go to www.joelosteen.com