Now that I no longer work for Ramsey Solutions, there is something I've been wanting to document for a while. It would have been awkward for me to do so while still employed there, as it contradicts the material that the company publishes.
When we moved to Tennessee to start working for Ramsey Solutions (legally The Lampo Group, Inc.), we had no debt. We had finished paying off credit cards, cars, student loans, and sold our house. My income varied from month to month, because Dave likes to put everyone on some form of commission. In 2011, my paycheck would vary by as much as 20% from month to month, depending on how the company performed overall, so there was no way for me to accurately predict what I would be paid in the coming month. I could predict the lower bound, but not the upper bound.
This only became more complicated once my wife got her TN nursing license and went back to work. Her hours were extremely variable due to scheduling, being called off, etc. Her paychecks we at least might have been able to predict - we knew her base pay, plus all of the different shift differentials (night shift, weekend nights, holidays, etc), but it would have been a little bit of an undertaking to do so.
To further complicate things, she was paid every two weeks, while I was paid twice a month. This also meant that some months she would get three paychecks.
During this time, the amount of money we had to budget from month to month at that point could vary by as much as 40%, and we would not know how much we had to work with in a given month until the month was almost over.
At that point we were not paying off any consumer debt, but we had a house payment. We were trying to pay it off, but at the start of the month, once we totaled up all of our fixed expenses, any savings we were trying to do (like going on vacation), we could not accurately predict how much we could pay towards the mortgage, and our loan company did not make it easy to make a second principle only payment. So, we would end up having to make the extra payment the following month - in other words, our extra mortgage payment was based on the previous month's income.
I was talking about this at work to someone on my team, and one of the longer tenured guyssaid something to the effect of "Why don't you just budget based on all of your income from the previous month?" That made a lot of sense for our situation, so we spent a few months building up our checking account balance to the point that on the final day of the month, we would have at least as much money in our account as we had been paid that month.
We did not have a name for that at the time, but a few years ago I learned that at least one company (YNAB, our primary competitor) gave it a name - aging your money.
As someone who has followed both the Total Money Makeover "Baby Steps" during the era of paying off our consumer loans, and later switching to "aging our money" in the pay-off-the-mortgage era, I want to highlight what is different about these approaches.
Dave has the "7 Baby Steps". The first step is to save an emergency fund - $500 or $1,000 depending on your situation. Then, you start paying off your consumer debts, smallest to largest. To do that, you need to know a few things:
- How much the minimum payments are on any debts
- How much money you make in a given month
- How much you plan on spending for the month for everything from food, clothing, gas, and ultimately debt payoff.
Dave's team has put together some "useful forms" for free, to help figure this out. As of this writing, the final one on the page, "Dave's Budgeting Forms", contains the most relevant forms in a single PDF. The final pages are the "Allocated Spending Form", which has 4 columns for different pay periods. This form breaks down a bunch of common budget categories down into these four columns, so you can allocate (or "tell your money") how much you plan on spending in that given timeframe (more or less a week).
We bought into the program before I worked for Ramsey Solutions, when we had a very predictable income (aside from an annual bonus paid out in April). We took FPU (then 12 weeks long) and following the budget forms. At the very beginning, we used the "Allocated Spending Form", doing our best to predict our monthly expenses. And, that worked until we moved and lost all predictability in our income. Thankfully we had no debts, so any excess money we earned went into savings.
Being a Month Ahead and Aging Your Money
YNAB has a great example of how to do this, and it somewhat mirrors what we were doing without having as conscious of a plan: https://www.youneedabudget.com/the-one-month-buffer-down-dirty/
This process takes some time. It requires setting aside some money every month, until you get to the point that the balance in your checking account is equal to the paychecks from the previous month. Now, maybe you still want to pay down debt during this time. The Baby Step method would want you to throw any extra money at debt, whereas YNAB's approach is not so prescriptive.
Beyond that, YNAB encourages you to have money that is at least 30 days old: https://www.youneedabudget.com/the-four-rules/#rule-four
I don't have a link (yet) to completely validate thisy, but with YNAB the age of money would also include any liquid cash that is in long-term savings or emergency fund. So, if your monthly income is $5,000, expenses are $4,000, your emergency fund is at $1,000, and on the first of the month your checking account is $4,000, you might be at 30 days age of money, but you aren't truly a month ahead until that checking account is at $5,000.
There are several discussions about what comes first - debt payoff or aging your money.
I am not sure exactly when we hit the "month ahead mark". I think it was some time in 2012. It took a little while to get there, but we had two big boosts.
- My wife went back to work. We had been living off of just my income, so her extra income was used to move us ahead
- A tax refund. Before I adjusted my W2, we got several large tax refunds. I believe it was in 2012 that the refund, plus her income, was enough to push us across the line.
A Sample Budget
Over at EveryDollar, Ramsey Solutions' budgeting tool, there is a sample budget. This appears to be a budget for a single person who has no debt, but is putting extra money towards their emergency fund, so per Ramsey, they would be in Baby Step 3. This example would also work if they were in Baby Step 2 if they were paying off debts, putting their extra money towards their debts instead of their emergency fund.
The budget along with allocations for each pay period for the month for this person might look like this:
|Category||Type||Amount||Pay Period 1||Pay Period 2|
|Income||Paycheck 1||$ 2,000.00||$ 2,000.00|
|Paycheck 2||$ 2,000.00||$ 2,000.00|
|Giving||Tithing||$ 400.00||$ 200.00||$ 200.00|
|Saving||Emergency fund||$ 400.00||$ 200.00||$ 200.00|
|Housing||Rent||$ 1,000.00||$ 1,000.00|
|Utilities||$ 200.00||$ 200.00|
|Food||Groceries||$ 400.00||$ 200.00||$ 200.00|
|Misc||Gas/transportation||$ 400.00||$ 200.00||$ 200.00|
|Health||$ 200.00||$ 200.00|
|Insurance||$ 400.00||$ 400.00|
|Recreation||$ 200.00||$ 100.00||$ 100.00|
|Personal||$ 200.00||$ 200.00|
|Misc/unexpected||$ 200.00||$ 200.00|
Let's say our example single person follows some very basic rules. Rent is due very early in the month. They tithe to their church 10% of their income, and do so in equal installments every Sunday. They buy groceries every Monday, they fill up their car every Thursday, and fund their emergency fund each pay period. They also have a simple life, and only incur at most one expense per day.
|Thursday, December 31, 2020||$ -|
|Friday, January 1, 2021||$ 2,000.00||$ 2,000.00|
|Saturday, January 2, 2021||$ 1,000.00||$ 1,000.00||Rent|
|Sunday, January 3, 2021||$ 100.00||$ 900.00||Giving|
|Monday, January 4, 2021||$ 100.00||$ 800.00||Groceries|
|Tuesday, January 5, 2021||$ 200.00||$ 600.00||Utiltiies|
|Wednesday, January 6, 2021||$ 100.00||$ 500.00||Recrecation|
|Thursday, January 7, 2021||$ 50.00||$ 450.00||Transportation|
|Friday, January 8, 2021||$ 450.00|
|Saturday, January 9, 2021||$ 450.00|
|Sunday, January 10, 2021||$ 100.00||$ 350.00||Giving|
|Monday, January 11, 2021||$ 100.00||$ 250.00||Groceries|
|Tuesday, January 12, 2021||$ 250.00|
|Wednesday, January 13, 2021||$ 50.00||$ 200.00||Transportation|
|Thursday, January 14, 2021||$ 200.00||$ -||Emergency fund|
|Friday, January 15, 2021||$ 2,000.00||$ -||$ 2,000.00||Transportation|
|Saturday, January 16, 2021||$ 50.00||$ 1,950.00||Misc|
|Sunday, January 17, 2021||$ 100.00||$ 1,850.00||Giving|
|Monday, January 18, 2021||$ 100.00||$ 1,750.00||Groceries|
|Tuesday, January 19, 2021||$ 200.00||$ 1,550.00||Health|
|Wednesday, January 20, 2021||$ 150.00||$ 1,400.00||Misc|
|Thursday, January 21, 2021||$ 50.00||$ 1,350.00||Transportation|
|Friday, January 22, 2021||$ 400.00||$ 950.00||Insurance|
|Saturday, January 23, 2021||$ 200.00||$ 750.00||Personal|
|Sunday, January 24, 2021||$ 100.00||$ 650.00||Giving|
|Monday, January 25, 2021||$ 100.00||$ 550.00||Groceries|
|Tuesday, January 26, 2021||$ 100.00||$ 450.00||Recrecation|
|Wednesday, January 27, 2021||$ 450.00|
|Thursday, January 28, 2021||$ 200.00||$ 250.00||Car maintenance|
|Friday, January 29, 2021||$ 50.00||$ 200.00||Transportation|
|Saturday, January 30, 2021||$ 200.00|
|Sunday, January 31, 2021||$ 200.00||$ -||Emergency fund|
|Monday, February 1, 2021||2000||$ 2,000.00|
We followed a plan like this in 2009. Our budget was not quite a simple as this, but it was close. Note that at several points in this example month, the balance on the checking account went to $0. Now, if you were working the "Baby Steps", you would have $1,000 in an emergency fund, but that would be only for actual emergencies, not "I feel like eating out tonight".
Shifting to budgeting a month ahead, instead of being at $0 left on the final day of the month, this person would have $4,000 sitting in their account, and $6,000 on the first after their first paycheck came in. Having this larger pile of cash would also afford more flexibility in when bills are paid. For example, on the "$0 at the end of the month" plan, this person has to pay for car maintenance ($200) and insurance ($400) in the second half of the month, because there is no room in the first pay period for them to absorb those larger expenses.
Our budget for most of our life has been heavily front-loaded, with most major payments are due in the first week of the month. Mortgage, utilities, and other bills are almost always due in the first week.
After we crossed the "month ahead mark", we could reliably budget our expenses. And, since we were aggressively paying down our mortgage, we knew exactly how much extra we could apply to the principle every month. We also could easily pay all of our larger bills in the first half of the month without having to worry about where the checking account would be two weeks into the month.
The very strict rules and forms of the Baby Steps helped to establish some discipline for us very early on, but in the long term aging our money to the point that we could budget on the previous month's income was a lot easier for us to work with and eliminated a lot of headaches.