As anyone who reads this blog knows, I’ve been using YNAB for over a year now, and I love it. I use the spreadsheet version because I’m kind of a spreadsheet geek. I’m always recommending the program to people who are working on getting their finances in order, but I find there’s always one big sticking point.
“I have to live on last month’s income? But I’ve already spent last month’s income!”
For those of you unfamiliar with YNAB, their site explains it in much greater detail, but in short, one of the basic “rules” of YNAB is to live on last month’s income. This means that on March 1, you know exactly how much money you have to spend in March. It prevents living paycheck to paycheck and you no longer have to wait for a paycheck to clear to be able to pay your bills. It’s really a great idea, but as many have pointed out, most people don’t just have an extra month’s worth of expenses sitting around.
The plan is designed so that you can use it while working to build up your buffer of an extra month’s worth of expenses. (Note that you don’t need to save up an entire month’s worth of income, just the money you will need that month. So if you manage to save up enough money to cover all of April’s expenses, then all the paychecks you earn in April will be your spending money for May (a.k.a. last month’s income).) You are encouraged to scrimp and save as much as possible so you can get to that point, and let me tell you, it’s a very freeing feeling.
One friend brought up an interesting question though. He had enough in reserve to pay for about half of his expenses for the month. Could he just pull the other half out of his savings so he could start following the “last month’s income” rule for YNAB the next month. His plan was to then work to repay himself so that he would never notice the loss in savings.
I wasn’t sure how to respond to this. Of course, he could do this. It’s his money after all, and he can do with it whatever he wants. It felt a little bit like robbing Peter to pay Paul though. Personally, I don’t like the idea of pulling from your savings unless you absolutely have to. Sure, he had the right idea in mind by planning to pay himself back. But why start anything at a loss? And how motivated would he really be to save up that much money?
He seemed very eager to start living on last month’s income, so I had a feeling he would be a much more savvy saver if he was working towards that goal rather than just jumping to the front of the line and then having to work to pay himself back. I don’t know about you, but if I have a debt to pay with no penalty, it’s probably not going to be my top priority, especially if it’s a debt to myself.
I’m not sure what he decided to do (and given that I suggested he not pull from his savings, I have a feeling that even if he does, he won’t tell me), but I think that overall, borrowing from your savings isn’t a good idea. It’s one thing to borrow from your vacation fund or your fun fund, but borrowing from basic savings seems like a loan that you’ll struggle to pay back through personal checks.