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.

Can I Make My Kid a Millionaire?

Like every woman, I am a fan of Pinterest. Cute little pins, especially financial ones have increased my savings by about 90%. One of those little pins says “How to Save $5000 for your Disney Trip by next year” It has a weekly deposit amount for a year and at the end of the year, you should have $5,512.00 added up. Another similar pin is from Dave Ramsey. It shows how two people can invest at different times in their lives, one from 18-24 and one from 24-65. The one at 18 invests $2000 for eight years and then leaves that money to accrue until he is ready to retire, then he will have so many millions for his retirement. The other has to scramble to catch up when he starts investing at age 24. So I put these two ideas together.

If I take my little Disney chart and change it to just $2000 a year, I will put into savings every week $64, then $63, then $62, all the way down to $13 in the 52nd week, I will save him $2002 a year. Each year, if I invest that $2002 until he is 18, he will never have to invest a dime of his own money. If he doesn’t touch it until he’s ready to retire, he’ll have somewhere along 5.9 million, assuming Dave’s rate of 12% returns (he invests in mutual funds almost solely). As discussed before, it’s hard to get that 12% rate, but not impossible. Either way, I’m spending very little of my own money to help my son. Now when discussing this with him, he informed me by the time he’s 65, he won’t need 5.9 million dollars, but stated he could, instead, add to my investment his own $2002 a year until he’s 24, then just retire in his late 30’s. I say that’s quite a genius idea!

So I wondered though, what if the market doesn’t ever recuperate from it’s poor rate of returns, what then will his money do? Is it worth it?  Well, it depends on your idea of worth, but it wouldn’t make him a millionaire. But from what I read, 12% is still a completely doable number in the world of mutual funds, and even Lending Club and Prosper apparently, so I’m going to give it a shot.

My bigger concern is when he turns 18, will he be financially responsible enough not to withdraw it all and go buy a motorcycle with it? Or when he’s 28 and his wife wants to take it out for something stupid, will I have taught him enough financially that he tells her no? I guess the real investment is in him, not any market; and teaching fiscal responsibility, well, isn’t that worth a million bucks in and of itself?

Lending Club and YNAB – my life savers

Since I stopped posting, we started a small business, borrowed about $5000 on our credit cards, and then we crashed and burned. We were months away from paying it all back and went and did something we thought would push us through early, instead, we sunk right down into the mud I had worked so diligently to get us out of.

As our credit cards slowly rose up, I thought, I have to take my own advice, dig deep into my own foundation. I looked at my credit card APR and thought there has to be a better way. Then I found one, Lending Club.

Lending Club is a peer-to-peer lending club that I started investing in several months ago. You loan people a percentage of their loan, (I stick to $25 notes) and they pay you back plus interest. Lending Club makes its money back in fees, which is usually about a penny per transaction. I literally started with $25.00 a month. I make anywhere from 9-13% interest on the note and reinvest the payments. There are tons of articles about Lending Club so do your homework on it.

Anyway, I decided I would apply for a loan with lending club. I paid off my credit cards, I have a fixed payment, and my APR went down 2/3 of what I was paying the credit card companies. I have a date on when my loan will be paid off and I don’t have to worry about surprise charges or fees. It is an automatic withdrawal from my checking account, (which I was always  terrified to do with credit card companies and have heard outrageous horror stories.) Another plus, my credit score went up almost 100 points! I’m not kidding, and so did my husbands.

Once I was set up, Lending Club sent me this little email offering me a percentage off a purchase of YNAB software, and I am so grateful.

YNAB is simply this, you need a budget. I told my stepdaughter to go to youneedabudget.com and she thought I was being smart, but I was totally serious. YNAB has four steps and is very promising if I stick to it. Rule one: give every dollar a job, in other words, budget down to the last dime. Rule two: save for a rainy day, these are those expenses you know you have to do like car tags, Christmas, and vet bills but aren’t every day, Rule three: roll with the punches, things happen and you may have to change things around in your budget and that’s OK, Rule four: live on last month’s income, create a buffer of one month’s income so that you are no longer living paycheck to paycheck.

Seems ambitious right? Saving a whole month’s paycheck? Start with ten dollars, eventually as you see it grow, you will find ways to fill it. Most people who use YNAB have this buffer in 6-9 months.

I have been using YNAB only about a month now, however, I have everything categorized and I track every expense as soon as I spend them. I was (guilty moment here) spending 10% of my monthly paycheck at restaurants… and not very good ones either. When I saw that, I knew things had to change. I’m getting very familiar with the ole peanut butter and jelly sandwich, and it’s OK, because I have goals that I can climb toward. I cut my grocery budget from $250 every two weeks to $88 every week, saving $74 a month. Just this week, eating from home, I’ve saved $55 in five days!!! If I take what I’m saving at the grocery store and what I’ve saved taking my lunch, I’ve saved $75 this week. Do you realize that’s $300 a month? I can take that $300 and put it toward my buffer, or I can start saving for things I want or need.

We are buying a new house, so I need a washer and dryer and a grill. That $300 I can split between those two categories, but I also want to put a little toward my buffer, so I will put $20 of this in my buffer, because I want to stop living paycheck to paycheck, and YNAB is helping me do that!

You get the drift, when you see what you are spending in black and white and you realize what you can have if you cut and save and delegate your funds, you can save your life!