How to feel better about your finances with a money buffer

On this blog I talk a lot about practical things - saving up an emergency fund, budgeting like a boss, and specific tips and tools for getting ahead financially. That’s all helpful stuff and I’m happy to provide some guidance and resources to help you.

Do you know why I’m really here, though?

I want to help you feel less sh*tty about your money.

I want you to feel more freedom and choice around your money.

I want you to feel less panic and more peace.

I want you to sleep better at night.

I want you to stop living beyond your dreams.

One of the best ways to achieve these things, that very few folks talk about, is a one-month money buffer. This is also referred to as living on last month’s income.

In a nutshell, you save up one full month’s income, leave it in your checking account, and then use last month’s money to pay this month’s expenses. Then, when you earn new income this month, you start budgeting it into next month. This is a game changer - especially if you’ve got a variable income from self-employment or freelance work. No more “well so and so is overdue on that invoice, so that money is basically here already, I’ll use that to pay this bill.” No more “sorry, contractor - I need to pay you late (again!), cash flow problems!”

When you can start living on last month's income, something magical happens. You make decisions based in reality. You decide how much you can spend on groceries this month based on how much money you have for everything and your needs, wants, and priorities.

Here’s an example of how this could look:

Let’s say you have $4000 in your checking account. That money needs to cover all your fixed bills - from the mortgage to the Netflix - as well as the variable stuff like groceries, clothes, gifts for friends and family, etc. After your fixed bills are accounted for you’ve got $1200 to work with. You look at your calendar for what you’ve got going on this month, check to see if the kids have outgrown their shoes again yet, and plan some money for those things. Then you’ve got groceries, that black hole of everyone’s budget. You look at some averages, take into account the bursting veggie garden out back (or the friends from out of town visiting next week) and adjust accordingly. Then you see what’s left and know, not just think, but know that what is left over is free to do what you want with. That money can go towards something fun like a weekend getaway or even something super fun like paying down a credit card.

What’s the difference between this and regular budgeting? When you’ve got a one-month money buffer in your checking account, you get to budget without having to worry if you really have that money. When you’re done with this budgeting session, you could go out and pay every one of those bills, today. In full. On time. Early, even! You could do this and be fine.

You could put some money into savings or towards paying off debt without feeling like you’re getting away with something. Without worrying if the money’s really there.

I recommend having a money buffer to everyone, but this is especially useful if:

  • You have a variable income (like from self-employment or freelancing). No more guessing what your income is going to be this month and making unstable decisions based on that guess.

  • You make a spending plan for this paycheck, and then immediately start making a plan for the next one, and the one after that. “OK, right now we have these bills but after this we’ll just buckle down for a while and by the end of next month we’ll have enough for That Big Thing I Want! Let’s just get it now and put it on a credit card, I just know we’ll be able to pay it off, look, I have it all planned out!”

Ugh, that’s me. What do I do?

You want to save up one full month’s expenses. You can do this the way you worked on your emergency savings, or just put whatever you’ve got extra each month away towards this until you’ve reached your goal. Another way to do it is if you’re using a tool like You Need a Budget (the only tool I recommend), once you’ve got to the point of your budget where you have money left over after your immediate needs are taken care of, move to next month’s budget and start budgeting this month’s extra towards next month’s necessities.

I hope that you can start to see how having a money buffer and living on last month’s income would change things for you. What would it feel like to have confidence in the amount of money you’re putting into debt or savings? What would it feel like to say, yes, we can take that vacation, it’s in the budget and - this is important! - not hear a voice in the back of your head that says “oh, but is the budget even real?

If this has been helpful to you, I’d love it if you could share it with friends. If you’ve still got questions, pop them in the comments below, or contact me. Happy buffering!

Psst...wondering how a one-month money buffer fits in your financial priorities? Here’s how it should go:

  1. $1000 emergency fund

  2. One-month money buffer  ← that’s this step!

  3. Pay off credit cards

  4. 3-6 month emergency fund

  5. All other debt

This is a great order if you’re self-employed. If you’re not, this is still a good order, though you might swap steps 2 and 3. Save for retirement along the way!