Rule Four:
Live on Last Month's Income

To be perfectly frank, we want you spending this month, what you earned last month.
This Rule is something to strive for, and likely isn’t something you can implement
right away. However, with the help of the other three rules, you’ll get there.

Rule Four

How it Works

Spend this month, what you earned last month.  How? Save enough money to go an entire month without touching your regular income. Then the next month, spend last month’s income while earning this month’s income. You’ll spend this month’s income next month. See how this works in YNAB 4.

Without Rule Four:

John lives paycheck to paycheck. He knows the date of his next paycheck well in advance, and has a stack of bills he’s timing to go out as soon as the paycheck hits his account.  He times bills to paychecks every pay period.  This is stressful:  juggling due dates, cash flow, and other unexpected expenses (Rule Two!).  He’s habitually stressed.

With Rule Four:

John has a month’s worth of paychecks saved before the month starts. (YNABers call this their “Buffer”).  When bills arrive, he pays them. He doesn’t worry about when the next paycheck arrives because the money’s already there.  He’s habitually happy.

Why it works

You Stress Less.

Operating on the brink of financial disaster, where you whittle your account down to three dimes and a nickel before payday, is no way to live.  Consider Martyn’s experience where his employer was late with their payday.  Martyn was following Rule Four...

“When we got our tax refund this March we were able to set aside one month’s expenses for the first time and stop living paycheck to paycheck.  This past week it came in handy when my company missed a payroll for the first time. While others panicked and ran about securing cash and delaying payments, I was able to cruise on through the week without worries.  The check has come a week late but six months ago a one week delay would have been disastrous.”

How many times are you stressing out about money simply because you’re not giving yourself some breathing room?

Save HOURS of Time NOT Timing Bills to Paychecks

For all the grief I get from people telling me they “don’t have time to do a budget,” I’m amazed how many of those same people have time to sit there and do the absolutely value-less activity of orchestrating some elaborate schedule of timing bills to paychecks.  Are you guilty of building out a separate spreadsheet, calendar, or ledger just to track it all?

Now ponder that for a moment.  I want you to set aside enough money so you can live off that money for one month.  Then you’re ahead for good! Money earned in Month One, will be used in Month Two. And what you earned in Month Two, will be used in Month Three.  You’re Perpetually ahead, and free from the wasted hours calculating your running balance of a future payday with bills almost past due.

Add in the time it will take to set up and maintain a budget, then subtract the time it used to take you to time your bills to your paychecks.  You’ll be hours ahead.  Julie and I spend 1-2 hours per month working on the budget (I don’t count the few seconds it takes me to enter transactions on my YNAB for iPhone (or Android). It’s time spent walking out of the store. I wouldn’t be doing anything else anyway.)

No Guessing at Income. Just Budget What You Have

All of you freelancers, Realtors, business owners, entrepreneurs—anyone that has a variable income from one month to the next: you can budget.

We talked in Rule One about choosing your priorities, Rule Two about guessing at inestimable expenses, and Rule Three about admitting the fact that your guessing will be totally wrong, and what to do about it.  Budgeting involves a lot of moving targets on the expense side of things.  If the income side is variable, it’s no wonder those people think budgeting doesn’t work.

Income is the most important number in your budget because it tells you how much you have to spend.  If that single number is wrong, things don’t work.

When you’re living on last month’s income, that income number is the most accurate number in your budget.  There’s no guessing about it.  It’s what you earned last month down to the penny. If you’re a realtor and you pulled in $1,000 in commissions, you know you’re dealing with a low month. It’s a known. It’s reality, and you can do things to get by. If you earn $12,000 in a fantastic month, you can look ahead, figure not every month will be that great, and ready yourself for some slumps.

Consider this tweet I caught a while ago:

@zanateh: “YNAB...gave us foresight in a flush Sept to prepare for lean Oct.”

I couldn’t have said it better myself. Especially not in 140 characters or less.

How many times are you stressing out about money simply because you’re not giving yourself some breathing room?

Budgeting involves a lot of moving targets on the expense side of things.  If the income side is variable, it’s no wonder those people think budgeting doesn’t work.

They couldn't figure out why they couldn't get ahead, until Stephanie realized they'd been focusing on the wrong thing.
Read the full story >

Common Questions About Rule Four

I’m living paycheck to paycheck. By definition, I don’t have any extra to break out of that cycle. What do I do?

Given your current mode of operation, you’re correct.  However, once you implement Rules 1-3, (especially Rule One), you’ll free up cash, experience “the raise” people get when they begin budgeting, and be able to begin setting aside money.

Do I Have to Follow Rule Four to Use YNAB?

Absolutely not.  It takes the average YNABer four months to save the money necessary to live one month ahead of their income.  Start with the other three Rules and you’ll be motivated at the progress you make.  Money will flow. You’ll feel super-focused, and you’ll get to Rule Four. And after that, shoot, you’ll be unstoppable.

Okay, how exactly do I get going?

We'll use an example with simple math.  Let's say you take home $5,000 per month.  Before finding YNAB, you spent $5,000 per month and lived paycheck to paycheck. Now, you've seen the light (hallelujah!).

Now, because you're budgeting and really working hard to live on last month's income, you're only spending $4,000.  That means you're saving $1,000 per month toward the Buffer. We capitalize Buffer around here because it's important.

If you save $1,000 per month for five months, you'll have saved a total of $5,000.  So at the beginning of the sixth month (remember, you used the first five months to save that $5,000), you're essentially sitting on a month's worth of pay.  You'll use that money for the sixth month, earn $5,000 during the sixth month, then use that $5,000 for the seventh month.

That's it. You're there. You will, forever and always, be living one month ahead.

And please don’t worry about all of the math here.  The software takes care of it all for you.  It’s built to guide you toward this Rule.  It’s a cinch. (The math part is a cinch. Actually doing the work of saving your money is on you. You can do this!)