A couple of years ago my husband and I decided that we wanted to live on last month’s income. We had been going through Financial Peace University at the time and were encouraged to use a budget. We tried paper and pen budgets but decided that it would be easier to use a budget app.
The app we chose was You Need A Budget or YNAB for short. The software teaches four rules to help you manage money effectively. The fourth rule is to live on last month income.
The reason the software wants you to live on last month income is to take the stress out of your finances. It is a way to know, in advance, that you will be able to cover your expenses and reach your financial goals.
YNAB’s reasoning is that is very stressful to juggle due dates, cash flow, and unexpected expenses throughout the month. It is also hard to save money without seeing the full picture.
When you live on last months income you are able to pay bills as they arrive and you have money waiting to be spent next month.
If you don’t have any money saved, this sounds like a daunting task. I want to let you know that it can be done if you have patience.
In this post, we’re going to talk about what it means to live on last months income, advantages of doing so, and what steps you should take to get started. Let’s jump right in!
What does it mean to live on last month’s income?
Living on last month’s income means starting the month with enough money to cover the entire month’s expenses.
In other words, paychecks that you receive in the current month do not get spent in the current month. Any money that you make this month gets saved to use for next month’s expenses.
For the current month, you are spending money that you made last month.
It sounds confusing at first, but once you get the hang of it, it becomes second nature.
Advantages of living on last month’s income?
There are several advantages of living on last month’s income. The first one is that you know all of your bills are covered before the month even begins.
My husband and I started living on last month’s income in 2015 and we have not looked back since. It feels so good to pay all of the bills at the beginning of the month and not have to worry about it until next month.
The next advantage is that you won’t stress as much about money.
Of course, living on last month’s income will not take all the stress away from your finances, but it does give you the peace of mind of knowing exactly what you can pay.
Another advantage is that you know when you are in trouble.
When you live on last month’s income, you will know in advance if you don’t have enough money to cover something in the upcoming month. This gives you a whole month to prepare.
You can start working side hustles to get the money or start looking for a new job without the stress of thinking about how you will pay the current month’s bills.
What steps should I take to get started?
Living on last month’s income is a lot easier than it sounds. Once you get over the daunting task of saving the amount of money that you need, it becomes clear and easy.
If you have an open mind and follow the steps below, you will get there in no time.
1. Save up one month’s expenses
I know this may sound hard especially if you are already living paycheck to paycheck, but it can be done. The first step is to figure out how much money you need to have to cover all of your expenses for one month.
Don’t forget to add in things like car insurance and subscriptions that may not be paid every month. I also like to add in an extra $100-$200 for incidentals in case something comes up.
Once you have this number, create a plan to save this amount of money as quickly as possible. Save every penny that you can until you reach this goal.
If you currently don’t make enough money to save, pick up a side hustle or two to help you get ahead.
2. Create a buffer
A buffer is like a holding place for your money. The buffer contains the money that you have made this month and it will sit there until you are ready to spend it next month.
It is basically like creating breathing room in your budget. Every time you get paid, add the money to your buffer until it has enough money to cover next month’s expenses.
When next month rolls around, empty the buffer and budget the money for the month.
To be clear, you don’t have to open a separate bank account for your buffer. Just create a category in your budget and keep track of the amount of money that you have there.
For example, if you need $1,500 to cover all expenses for next month, add every penny that you make this month to your buffer category. When your category reaches $1,500, your buffer is full and ready to be spent next month.
While the money is in the buffer category, do not spend it. Let it sit there until next month.
When you’re ready to use this money, make the balance zero to budget the funds like you normally would. Budget programs like Everydollar and YNAB make this concept super simple.
3. Use a budget
In order to manage your money while living on last month’s income, it is imperative that you use a budget. This will help you keep track of your paychecks, buffer, and bills.
The budget is the key to reaching any of your money goals. It’s so important to stick to your budget especially if you’re going to be living on last months income.
The failure to do so could cause you to fall back into the paycheck to paycheck trap.
Create a budget that you love and understand. This could be a pen and paper, a spreadsheet or an app. Just be sure that you love it so that you will actually use it.
I have talked about it before, but my favorite budget software is YNAB. I absolutely love this software and I can say that it is the reason that I am where I am financially today.
4. Don’t give up
No matter how long it takes for you to progress and fund your buffer, don’t give up. Keep working towards your goals and you will reach them. This is not a race that you have to win.
If you struggling to save the money just create a smaller goal and work towards it one step at a time. Whatever you do just don’t give up.
I have one month’s income saved up, now what?
Now that you have completed the hard part of saving up the money, it’s time to put this concept to practice. When the first of the month rolls around, make your buffer category zero and the money is now available to be budgeted for expenses.
Budget and use the money that you saved last month to cover your expenses for this month.
Any money that you make during the current will go straight to the buffer for the next month. It may feel really strange at first, but you will enjoy it more as you get the hang of it.
The Bottom Line
Living on last month’s income is the best decision that I have ever made for my finances.
I’m able to pay all of my bills on the first of the month and I know how much money I have available for next month’s expenses.
You may not be able to live on last months income immediately, but keep working at it and you will get there. Follow the steps and keep working towards your goals.