One of the biggest struggles I’ve had over the years with having a semi-budgeted environment was that I never seemed to have enough money in my account to be able to pay every bill that was due.  Well, I’ve defined a very simple way to avoid this scenario once and for all.  I’ve applied a "budget buffer" to my account.

Budget Buffer - the amount that you always want to have in your account the moment your last regular paycheck of the month is deposited.

Calculating Your Budget Buffer

The first thing we need to do is find our total monthly expenses.  If you’ve got a budget already set up, great!  You already know this number.  If you don’t have a budget, I suggest you start with creating one so you can systematically examine every outgoing expense tied to your money.  If you don’t know where to start try taking a look at my budget page or check out Being Frugal: How to Make a Budget that Works.)

Photo by temptingmama

Once you’ve got your list of all outgoing expenses add them up for one month and you’ve got your total monthly expenses.  Write down that number.  We’ll need it soon.

Next, we need to define your regular paycheck amount.  For salaried folks, this is easy.  For hourly employees and those with irregular incomes, you’re going to have to make a best guess here and depend on a larger emergency fund to help in slow months.  All we need is the amount of your paycheck.  Weekly, bi-weekly, semi-monthly…doesn’t matter.

Finally, we just take the total for your monthly outgoing expenses that we’ve already calculated and subtract the amount of your regular paycheck from it.  The Budget Buffer amount is the difference between your total monthly outgoing expenses and your regular paycheck amount. 

For example, if you’re monthly expenses are $3000 and your regular paycheck amount is $2000 every two weeks, then your budget buffer is calculated to be $3000 - $2000 = $1000.

Applying the Budget Buffer

Now that we’ve defined what your budget buffer is, it’s time to do something with it.  The main objective in my approach is to make sure that your bank account has a balance greater than or equal to the budget buffer at the same time you get your last paycheck for the month.

We want to keep this as simple as possible, so no matter what happens do NOT let your account balance end up at less than your buffer during that last payday.  You want to ensure that you have the full amount of all expected expenses for the next month before that month actually starts.

Did you catch that?  For the month of April, if your budget is $3000 a month, you’d better have at least $3000 in your account during your last payday in May or you might not be able to pay all your bills!  If you’ve got your budget buffer in place before that last payday even shows up, you’ve got it made.

Why use the Budget Buffer?

So you may ask, "What’s the point?  Can’t you just make sure you have next month’s budget at the end of each month?"  The simple answer is YES.  However, if it were just that simple, the last couple times I’ve tried to do that it might have worked for me.  I don’t find it a mathematical complication more than I find it a behavioral one.

Most people have two paychecks per month for most months in a year.  (I know there’s a couple extras in there.)  Budgets tend to work on a monthly basis.  Many people I’ve known, including myself, would sit down once a month and figure out all the bill amounts and just start writing checks.  This would be fine for the one pay-period during the month when you did your bills.  However, that second pay-period was often treated as "extra" money once the bills were paid without considering when the next pay-period would fall during the following month.  This scenario opened the door for some unavoidable late payments because the money was not there until the first paycheck of the next month showed up.

For everyone mumbling something about self-control and stupidity, please have a little compassion for the people that struggle to focus on their budgets on a regular basis.  Obviously looking at things monthly doesn’t work for some people and they need something to measure up against during the "second payday" of the month…the budget buffer can be just that.  It’s worked for me so far, and if that’s the case I know it can help someone else too.

Example Scenario

Share the Understanding

Really, just how far off is this from a scenario you’ve experienced?  I’ve lived this a dozen times the last few years before really making some personal changes.  One thing that really helped me explain to my wife how much we could really spend between steps 3 and 4 in the example was the budget buffer:

"If we don’t go below $1000 in the account before next payday, we’ll have exactly what we need for next month."

"But if we have to we can spend the rest?"

"Yes, if we must…but we CAN’T make it next month if we do more than that."

If the budget buffer is applied to the account in step 3, the balance would have never gotten below $1000 before getting paid on March 28.  The new clothes and trips would have had to wait.  The eating out and drinks would have been pasta with water.  And everyone knew where to draw the line in the middle of the month because we had an exact number that we couldn’t let the account balance fall below.

Personally, I’d have rather applied that extra $200 in the budget toward debt and maybe snowflake a few more bucks out of the budget for the month, but as you can see with the above scenario…the negative effects can grow exponentially out of budgeting control.

So give the budget buffer a try, and I assure you…the money will more likely be there the next month when you most need it.