It’s tax time. A time of pain for some; a time to receive a little extra cash in the form of a tax rebate for others. If you fall into this latter category, you may be able to take advantage and make one of the biggest and best steps towards effective budgeting possible.
What is this step? It’s the first rule in YNAB’s methodology. They call it “stop living paycheck to paycheck.” I call it living on last month’s income or living a month ahead. I explain it in more detail in my YNAB review, and they explain it a bit better at YNAB.com.
Basically it’s the idea that the money that you make this month, you are able to spend during the next month. So my whole spending budget for March is using funds that I made during February. While not revolutionary, this approach to budgeting is actually extremely effective. I find the following three benefits from living on last month’s income:
- You no longer have to time bills with your paychecks (living paycheck to paycheck). Not only does this take extra thought and planning (not to mention stress), but it also saves a ton of time. My wife and I can knock out all of our bills for a whole month in a matter of minutes.
- The folks on variable income (who have previously had a tough time budgeting because they weren’t sure how much money they would have that month) now have a set amount of money to budget for the month. This is a benefit that we’ve also felt, even though our monthly income only varies ever so slightly. There’s something about having a plan for every single dollar in your budget (because you have a finite number to work with) that makes budgeting SO much easier.
- You are no longer living on the edge. It’s an enormous comfort to have a good month of padding for your finances. Even for those who have a hefty emergency fund or savings, this breathing room in your bank account is a nice thing.
While the YNAB software is built to help facilitate this practice of living a month ahead, by no means do you need to use that particular software in order to fully reap the benefits of this awesome principle. I personally know someone that does very little in terms of tracking his finances yet he has been following this idea for years. He says he’ll never go back.
Now I’m sure that there are many people who would disagree with this principle, based mostly on a possible loss of more income if this extra money isn’t in an interest bearing account. For the financially disciplined, it’s true, you may be able to squeeze a few more dollars in interest out of that extra cash. But for most of the people that I know (myself included) the benefits of a more efficient and productive budget far outweigh the costs. I personally believe that a well planned budget will restrict excess spending that would have otherwise occurred (likely a larger amount than any money you may have made in interest).
So regardless of how you do your budget, when deciding what to do with your tax return this year, consider using it to help you incorporate this budgeting method in your finances. It’s certainly not an easy task, but living off of last month’s income may just be the best budgeting move you’ve ever made.