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.


Where Were the Watchdogs?

it would have continued to be a sure thing except one thing, people stopped paying their mortgages

Economic crisis -Isn’t this the understatement of the century. Going from a time of economic boom to giving soup-kitchen hand-outs to big name business, the World’s economy hangs on a ledge of little hope. Where were the watchdogs when the American stock-market became its own worst enemy?

CNBC depicted it perfectly in its story, House of Cards,  when they showed that the governmental standards weren’t up to par to prevent a crisis such as this. At one time, not so long ago, the American housing market was at an all-time high, and everyone was cashing in. From Lebanese businessmen, to pizza delivery guys, everyone had a mortgage to sell, and everyone wanted a home.

Businesses such as the company Quick Loan Funding  and other Internet based banks were selling mortgages to unqualified buyers like candy. No qualifications or standards were required for these mortgages. As long as someone on wall street would buy these mortgages, they were selling and profiting. Quick Loan Funding was basically an infomercial, “As seen on TV” type mortgage company. People who bought these mortgages usually were refinancing with the low APR’s they were offering. A new beginning to the buyer, a quick cash scheme for the sellers.

There were other types of mortgages that were available such as “Interest Only” loans and ridiculous mortgages that allowed the buyer to pay a percentage of their payment, in some cases, raising their mortgage principals instead of decreasing them. Anything was game, and wall street bought into it all.

Wall Street also bought into the dreaded CDO’s. CDO’s were mortgage packages, so to speak, these were grouped mortgages, such as entire subdivisions, that complicatedly grouped together and sold to mostly European and Asian governments and municipalities to gain revenue for their area. They were told this was a solid, AAA investment. This was the problem.

Rating agencies, such as Standard and Poor, were to rate an investment as a AAA or a BBB. The AAA’s were less risky, solid investments and the BBB, of course, meant more risk. With everyone cashing in and putting pressure on these rating agencies essentially lowered the AAA standard. Possibly because, if other rating agencies were lowering their standards, and your agency did not, you lost business. Therefore, the greed of Wall Street drove them as well. 

This is why that the economy nearly world wide is poor. A big percentage of Wall Street investors are other countries. Investing in American businesses has almost always been a sure thing, and it would have continued to be a sure thing except one thing, people stopped paying their mortgages. These investments were based on the future revenue of mortgage payments and interests. That required that mortgages be paid to pay out on the investment. Americans began to refinance their homes, taking out home equity loans to pay off their credit cards, using the equity in their home as an ATM machine. Once they paid off their debts, they charged them all up again. The greed of the banks and wall street drove them to never say “enough is enough”. No one ever told the buyer you are over extending yourself. The banks were driven by the competition as well. If the banks said stop, the consumer took their business to another bank. After three mortgages and $50,000 dollars of credit kept families from eating, Americans just stopped paying, thus spiraling our economy into the mess it is now.

So where were the watchdogs during this? The voice of reason from our government stepping up and saying, “there must be better standards.” America’s government has committees and bureaus that watch these kinds of things and they turned a blind eye to it. Perhaps they were cashing in too. Greed was driving everyone all over the world, perhaps the pressure was too great to put a stop to it. Who knows. What is known is that now, when it is too late, they want to scoop in and try to dig us out of the cavern of debt by using spoons. It is not going to happen by handing out big bucks that WE DON”T HAVE to companies that just didn’t know what they were getting into, or the ones that just didn’t care.

So now we all sit and wait, watching the disaster unfold in front of our eyes and think there is nothing we can do to change it. The truth is, I haven’t the answer. All I can do is take care of what is mine. Pay my bills and my mortgage, and clip and save, and hold onto what is more precious than money. Perhaps if we all do the same, we will find a way out of this Economic crisis.