Early in our marriage, my husband and I both worked entry-levels jobs. Neither one of us earned a large salary and we struggled to break the paycheck-to-paycheck cycle. I did some research and it wasn’t long before I learned about the benefits of living on last month’s income.
When you live on last month’s income, you start the month with enough money in the bank to cover your entire month’s expenses. Think of this amount as a buffer that allows you more time to plan when an emergency arises and lets you effectively budget for an entire month.
Living on a budget is not an easy task for many people. Living on last month’s income seems even more daunting as it can take time to build a buffer to carry you through a month. When you work to save money each month through different cost-cutting measures, it can be done.
Here’s why you should live on last month’s income and some tips for how to budget one month ahead:
You Always Have Money to Pay Every Bill
Our current monthly budget requires $7,000 per month. It seems high but we pay just over $3,000 a month in student loan payments to conquer my husband’s six-figure medical school debt.
On the first of each month, I make sure that we have $7,000 in our joint bank account. Because I have a variable income, sometimes this means I have to dip into savings.
Other times, we have a surplus and I move money back into savings for future months that we might be short. Budgeting on a variable income can be a challenge but thanks to living on last month’s income, we’ve been able to make it work.
You Will Be Less Stressed
I can’t convey enough how nice it is to know that we have enough money for all our bills every month. When you’ve lived paycheck-to-paycheck before, living on last month’s income instead of last week’s brings an incredible sense of security.
If you experience an unexpected bill, you don’t have scramble or stress about how to pay for it. You simply rely on your emergency fund to make the payment.
We keep a minimum of $1,000 in an emergency fund (although ideally we’d have much more).
If our car needs a $400 fix in the middle of the month, I transfer that amount from our emergency fund to our checking account. That way, the budget doesn’t change due to an unexpected, unplanned expense.
If you don’t have an emergency fund, starting one now is vital. CIT Bank is a great option to put your savings as they have a $100 minimum balance requirement and pay 1.55 percent interest.
You Don’t Need to Worry About Bill Due Dates
Prior to living on last month’s income, I had to call our creditors and utility companies to make sure that our bill due dates came after we got paid.
Now that I start every month with enough money to cover all bills, I don’t worry about due dates. In fact, every single bill I pay (except the check I write to my daughter’s ballet school) comes out automatically.
I do monitor our money throughout the month to make sure no one overcharges me. For the most part, though, all those automated payments come out on their own with very little stress or maintenance from me.
It Makes Budgeting Easy
When you’re trying to live on a budget, living paycheck-to-paycheck can be difficult. You start the month with a spending plan but staying within budget depends on a timely and steady paycheck.
If you have a variable income like I do, a budget like this is simply a wish list. However, if you live on last month’s income, even with a variable income, you know that you have enough money to meet your budget. This is extremely helpful if you’re also using a zero based budget.
First Step to Take if You want to live on last month’s income
So, what’s the first step towards living on last month’s income? Simply put, you want to track your spending.
Tracking your spending allows you to see where your money goes each month. This gives you the knowledge to make decisions that will have a direct and positive impact on your finances.
It sounds overwhelming if you’ve never done it, but tracking your spending can be quite simple when done wisely. Tiller is a great service that helps you analyze your spending for savings opportunities.
Tiller makes monitoring your spending simple. The service connects to your bank and automatically pulls all of your transactions and puts them in a Google Sheet. This lets you go through your spending and find potential savings opportunities.
Tiller offers a free trial for the first 30 days and costs $5 per month if you decide to keep the service.
Once you examine your spending and identify savings opportunities, it becomes simpler to work towards living on last month’s income. Even if you don’t choose to live on last month’s income, the exercise is useful for anyone wanting to become financially fit.
Since I started budgeting one month ahead, my life has changed for the better. If you want to switch to this type of budget, but don’t know how, spend 2-3 months tracking your spending and living very frugally. This should give you time to save up one month’s worth of expenses.
You can even have a garage sale or sell furniture on Craigslist to jump start your savings. I promise that every effort is worth it.
Now that I’ve committed to being one month ahead, I can’t imagine ever going back to the paycheck-to-paycheck lifestyle.
What kind of a budget do you use? Do you think you could live on last month’s income? What’s the biggest benefit, personally speaking, to budgeting one month ahead?
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Source: Frugal Rules