I can’t tell you how important this rule is to our family. But if I had to boil it down to a few reasons, here they are. Spending this month’s income next month will revolutionize your financial situation. You’ll start to notice other people talking about waiting for the next paycheck – you won’t have to.
The funny thing is, we ran into this concept by accident. It came from the need to create a straightforward budgeting method that didn’t depend on rough estimations of income or variances in paycheck dates. It was born out of pure necessity. Later, we found out that it was not uncommon for financially aware people to implement this method.
The Top 5 Reasons:
- It creates a lack of immediate dependance on your next paycheck. We’ve all heard people around the office talking about payday. They have grand ideas of what to do with their money the day they receive it. Receiving a large sum of money can tempt a person to spend a good portion of it on discretionary items. When you are a month ahead of the game, you can focus on what’s most important: making money for next month and budgeting it accordingly.
- It reduces greed. By having a plan for your money, you can reduce your constant focus on the next paycheck which may result in greed. I’ve found this to be true in my life, because I now feel that the work I’m doing is for the future and has a purpose.
- It creates a one month emergency fund automatically. Having a month’s worth of income between you and the unknowns in life will ensure that you don’t have to dip into your fully-funded emergency fund as often. It’s simply another way to automatically save your money!
- It provides peace of mind because you don’t have to worry about whether your money will come before your bills. On the 1st of every month, you’ll have all the money you need for paying every bill from the 1st to the 31st. No more having to time your bills with your income!
- It gives you an unbiased look at your financial situation. At the end of every month, my wife and I look at our budget and adjust as needed. Having the money written down that we’ve made this month shows us our true income, and allows us to give every dollar a name for the next month. No more do we have to estimate what we make. We see every dollar earned, gifted, and sifted from underneath our car mats.
Yeah, but how do I get to that point?
Whenever I tell people about how important it is to spend money they make this month next month, they usually ask the same question: “Yeah, but how in the world do you get to that point?”
It won’t be easy, and it may take you a few months. The fastest way to get ahead is by budgeting and squeezing your income for every extra dollar you can muster to put into a savings account. Once you have enough money in your savings account to match your average net income, you can begin the process of spending this month’s income next month.
It’ll take sacrifice. But it is a short journey that will result in years of financial peace. It is, however, only one small step towards financial freedom. Stay tuned for daily tips and subscribe for free to The Christian Dollar.
What an interesting concept! I can see an immediate usefulness in our household, as both of us have fluctuating incomes. I know Dave R’s answer to this is to pay the most critical bills first (keep the lights on and the bellies filled), but in real life, the bills don’t arise in order of importance … they arrive by due date. I fail to see the rationale in skipping a credit card payment when the negative impact is so great; you are immediately charged a late fee ($39 in my case) plus the credit card company has an excuse to raise your interest rate, and they will. Thanks for a great idea
Julie, I’m glad you like the concept! I can’t tell you how many times this tip has made it easier to keep our budget rolling. I think Dave Ramsey was mostly talking to people who were behind in their payments or had such a limited income that they had to prioritize month-to-month. For most of us, spending this month’s income next month is the best solution. I appreciate you being a dedicated reader!
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John, this is a great idea!
My wife and I have tried to help others know how to spend wisely when they have variable incomes and this concept is brilliant! I have always had a very steady income so it has been easier for us to budget. It has been difficult for me to help those with variable incomes. How do you plan for the next month? This gives me a great (but not easy) tool to suggest.
Thanks!
Billy
Hi, I like this idea, I am willing to give it a try. I have be on the budgeting roller coaster plenty of times this year, and I will admit I slacked a lot. It takes a lot of discipline to sit down and really do this. But I also know it works. Dave Ramsey is a great guy and has great ideas and I learned how to get out of that major, major debt and followed a lot of what he suggested in a lot that he has said.
I love this idea. and its great. I am willing to try this. I am so excited.
Then I realized I was already frugal in many ways. So the budgeting thing was just the scariest part. So if I take my talents as being frugal and put it into a budgeting plan I will be debt free and happy. Our goal is to buy a house in less than 2years from now, I see it happening. But my problem is discipline. I have to set aside time to sit down and work on it and stick with it. So pray that I can do this and make myself. Its not a bad thing I just get distracted
Thanks Melissa for sharing! Trust me, you’ll love the feeling when you’re consistently a month ahead. It’s worth the effort! Keep us updated on your progress!
John I love the month ahead concept….then you do not have to develop paycheck budgets…you can just budget for the whole month at once…..question how do you have discipline not to spend this months paychecks??….
The discipline is the hard part at first, but once you’re on a roll, it’s so easy! After awhile you don’t even have to think about it. Thanks for being a reader Matt!
We learned about the strategy of saving enough so that you can budget and spend the income you received last month this month from Jesse Mecham. Jesse developed software called “You Need A Budget”, better known as YNAB a several years ago.
The strategy of ONLY spending last month’s income really took all the pressure off and it gives us more time and confidence to plan next month’s spending well before the month begins. We still get a high from paying ALL our bills by the 4th of EVERY month. It is a rewarding goal to focus on.
Excellent! Yes, I’ve heard some great things about YNAB! Glad you concur and thanks for being a reader!
This is a very interesting concept, I am definitely going to look into this some more. With tax returns coming soon that might be a good way to bump up your checking account to achieve this a little sooner. My biggest concern would just be the temptation to sepnd a little extra each month because you know that you have extra money in your account.
Not only does having a buffer of savings help with the things you mentioned, like greed, but life happens and sometimes we don’t get that money we were counting on. If you have savings built up it can buy you a little time to get back on track.
That being said, you can have some money saved up and still plan on what bills each of your paychecks will cover. i.e. Your 2nd paycheck of the month will cover your mortgage payment. This helps because you are designating what the money is for. In a sense, you are spending your current paycheck, but if you have some money saved up you can call it last month’s income paying for this month’s mortgage.
I started doing this with my family for the same reason, necessity. I will never go back. If you do this, it’ll change your financial life. I thought I was a genius because I thought of it on my own, but little did I know financial savvy people have been doing this for years and I’m just now getting on the ball (as of December 2010).
tim.reformata.
I’m so glad it’s working for you Tim! Isn’t it just one of the best rules of budgeting?
I myself have stopped living paycheck to paycheck, t feels good to have that much savings and living below your means.
I do this as well, often. We have the extra money in savings and my mine goal is just to pay my bills as soon as possible. Being debt free is awesome.
Way to go Chris! Isn’t it nice to have a buffer?