Bi-Weekly Pay, Envelopes, and Rule 4

dplems721dplems721 Posts: 3Member
edited May 2013 in Desktop
Hello all,

I downloaded the trial of YNAB and of course, given the hundreds of reviews, power of the software, large user base, and support, etc… it really is one of the best budget programs available. However, I had a quick question that I'm sure someone can help with.

When I decided at the first of the year to budget I began using a different on line budgeting software. It is a strict envelope system and I simply allocated all of my money into the envelopes (gave every dollar a job) and it's been working well. However, YNAB is more full-featured and I think it functions much better in other areas. Here's my question/issue:

With strict envelope budgeting it works very well for me as I'm paid every two weeks. What I don't spend stays in the envelope, carries over the the next month, etc… Because YNAB is based on a month-to-month system it seems that I'm about to overspend in a category where my other system still shows a decent amount in my envelope/category. After reading through a few forum posts I realize that I could treat YNAB exactly like I do my other on line budget - simply add the income as I get it and budget every two weeks. But… that doesn't really work with Rule 4. I currently have enough for a buffer (live on next months income). Maybe it's just the perfectionist in me - I don't want to overspend in a category.

A couple of other forum posters said that they use the extra income that they will receive twice a year (in the months they receive a third paycheck) to allocate to debt-payment, Christmas, or other rainy day categories. I could do that, but what if I would rather treat YNAB more like a basic envelope system? How would one go about setting up her/his budget yet still implement Rule 4?

I realize one response could be, well… just keep using your envelope system. But, I really like YNAB for other reasons and I'd like to continue using it. Any suggestions on how I could set this up? Maybe I'm just missing something or making too big a deal out of this.

Hopefully this post wasn't too confusing. Thanks in advance for suggestions/advice! The forums on here really are fantastic.
Post edited by Unknown User on

Comments

  • Budget_NinjaBudget_Ninja Posts: 4,762Member, Beta Tester
    Rule 4 is basically just another envelope that get's cycled each month. Don't get too hung up on rule 4, there is a reason they moved it to the last rule. Still a worthy rule.

    If you find you've mis-allocated your funds, you can take funds from another category to ensure you don't overspend the category in question. Ideally the exercise involves you weighing the pro's and con's of the shifting of funds and the reallocation should align with your personal values. Do you value McDonald's more than Rent? Simplistic evaluation but it hits the point. Do you know why your other system shows money in this category/envelope while YNAB doesn't? Did you not budget the same when you set up YNAB?

    YNAB is an envelope system, add income every two weeks until you've achieved rule 4, budget the dollars to categories that need funds before you get paid again. Don't forget to fund those rainy day categories so they don't derail you when you have to expense them - like Christmas or Annual insurance payments.
  • MalisaMalisa Posts: 6,140Member, Moderator, YNAB Team, Beta Tester
    Welcome!

    (ETA: I typed mine while Budget Ninja was typing his. I haven't read or edited for overlap. )
    dplems721 wrote:
    Hello all,

    I downloaded the trial of YNAB and of course, given the hundreds of reviews, power of the software, large user base, and support, etc… it really is one of the best budget programs available. However, I had a quick question that I'm sure someone can help with.

    When I decided at the first of the year to budget I began using a different on line budgeting software. It is a strict envelope system and I simply allocated all of my money into the envelopes (gave every dollar a job) and it's been working well. However, YNAB is more full-featured and I think it functions much better in other areas. Here's my question/issue:

    With strict envelope budgeting it works very well for me as I'm paid every two weeks. What I don't spend stays in the envelope, carries over the the next month, etc…

    Perfect, same with YNAB.
    Because YNAB is based on a month-to-month system it seems that I'm about to overspend in a category where my other system still shows a decent amount in my envelope/category.

    Not sure why that'd be the case.
    After reading through a few forum posts I realize that I could treat YNAB exactly like I do my other on line budget - simply add the income as I get it and budget every two weeks.

    Yes, that's what you should do if you don't have a buffer.
    But… that doesn't really work with Rule 4. I currently have enough for a buffer (live on next months income). Maybe it's just the perfectionist in me - I don't want to overspend in a category.

    If you have enough to live on last month's income, you have a buffer, and you shouldn't have to budget every two weeks. You should be able to budget your envelopes 'full' at the beginning of the month vs. twice during the month. There shouldn't be any overspending. If you end up overspending in a category, you could move funds from one envelope/category to another, but I don't think that's the issue you're talking about.
    A couple of other forum posters said that they use the extra income that they will receive twice a year (in the months they receive a third paycheck) to allocate to debt-payment, Christmas, or other rainy day categories. I could do that, but what if I would rather treat YNAB more like a basic envelope system? How would one go about setting up her/his budget yet still implement Rule 4?

    Best case, you budget to all those rainy day categories (envelopes) each month. Again, I still don't see where the perceived conflict between budgeting for rainy day funds, etc. (rule 3) and rule 4 is.

    I'm sorry that I'm not understanding your question. It's often true that people with some sort of budget experience have a harder time wrapping their head around YNAB. We'll help you out.

    Join us for one of our free, online Getting Started classes.
  • JoelJoel Posts: 9,785Member, Beta Tester, Beta Moderator
    All Rule 4 does is delay when you fill your envelopes. Instead of filling the envelopes right when you get paid, you wait until the start of the next month to budget those dollars to the envelopes. If you have to overspend categories in order to mark your income as for next month, then you do NOT have a buffer. A buffer is when you do not need that money. One possibility (which I would recommend) is that if you overspend a category, you should find another category to rob from by budgeting a negative amount to the category to pull money out of the balance and use it on your overspent category.
  • RoloRolo Posts: 297Member
    dplems721 wrote:
    With strict envelope budgeting it works very well for me as I'm paid every two weeks.
    Here's the paradigm-shift: divorce these two: budget and payday. When you get paid has no bearing on your financial plan (budget) when you implement Rule 4.

    It will be May in a few days and if you haven't finished earning all of your income for April, you will today or tomorrow and you will know exactly how much income you have for May (May's total budget = April's income). It doesn't matter when or how many installments your income arrived. The nice thing for you is that you cut your time fiddling with budgeting by half at least!

    Now that you know May's total dollars in the employment line, assign all of them jobs and don't overspend in any category. If you do overspend in a category (things happen), adapt accordingly (Rule 3) by adjusting your current month's budget or let it carry forward to next month's (however you did it with the envelope system, which I assume you just shifted from other envelopes when the overspending occurred--no different in YNAB only it's just typing).
  • dplems721dplems721 Posts: 3Member
    Thanks for the replies all. I realize my initial post was a bit confusing. I'll try to clarify and respond. Very helpful.

    I recently read that moving from a bi-weekly budget to a monthly budget works (not using YNAB - just a spreadsheet) like this)
    First option, you setup your budget for only two paychecks a month. Two months out of the year, you get a third paycheck. Its like a bonus. Frankly, I use this 'extra' check to handle annual/semi-annual expenses such as car insurance.

    When I transferred my numbers from my initial budget to YNAB, 10 months out of the year I'm 8% short comparing bi-weekly to monthly. That's why I'm short in a couple of my categories - my initial envelope budget doesn't work monthly. Bi-weekly builds in those extra two paychecks every allocation while a monthly budget, based on any of the "normal" 10 month incomes, doesn't. I just need to learn to live on 8% less per month and then when the extra comes in twice per year then I can allocate that extra money accordingly. To use YNAB terminology, my available to budget will be more 2 months out of the year, regardless where I allocate it. On a bi-weekly budget the amount always stays the same. I would never see an increase (without a raise, extra income from another source, etc...)

    I wouldn't have run into this issue if I had started with YNAB. I would have just taken my monthly income that I receive in one of the 10 months and worked from there. It's only because I'm shifting from bi-weekly to monthly that I'm having the additional learning curve. It's been tough to wrap my head around, for sure. As malisab stated: It's often true that people with some sort of budget experience have a harder time wrapping their head around YNAB.

    If anyone has any extra advice to add please do. If nothing else, hopefully this thread will be of use to someone else who struggled as much with this issue as I did. Even reading through the comments on this thread helped greatly. Thanks!
  • tripletimextripletimex Posts: 40Member
    Just as something else to throw out there: There doesn't have to be a shift from biweekly to monthly as far as thought process goes. Many people learn to live off of two paychecks in 5-week months, and that's what gives them the extra. They are still paying five weeks of gas instead of four, but they know how to make it work on only the money they'd normally use for a 4 week month. If things are tight, you don't have to make that shift; it just smooths everything over mentally when you can tally a quick number in your head to know how much to budget for each month, instead of trying to remember whether you need to pay the babysitter 4 times or 5 times.
  • bobbucybobbucy Posts: 265Member
    My wife and I do have a buffer and receipt each paycheck as money for the next month. However, I am paid bi-weekly, and our budget would also come up a little short without those 2 extra paychecks. I can't tell you the exact percentage right off, but I think that our situation is similar to yours. The way we handle that is to defer payment into some sinking funds until the months with a 3rd paycheck. For example, real estate taxes are paid each December, so we set aside money each month to save up for that. However, simply dividing by 12 is too much for the monthly budget. So we budget a bit less each month out of the usual 2 paychecks, but then add more to that category in the months with an extra paycheck. Maybe you have some similar categories that you can put off filling until the month with a 3rd paycheck?
  • gabicatgabicat Posts: 5Member
    And here's yet another approach I read about in a previous thread and will be implementing in May. I'm in a similar situation (bi-weekly pay, need just a bit more to be comfortable for an entire month).

    May happens to be a 3-paycheck month (and our first buffered month, whoohoo!) so I will send two of the paychecks to June, mark the 3rd one as income for May and immediately put that amount into a holding category in the budget (I'm calling it The Lockbox). Since a 3rd paycheck happens every 6 months I will "release" 1/6th of it to the budget each month until the next 3-paycheck month, then start again with a topped off Lockbox category.

    So our cashflow will be smoothed out and hopefully we can get our rainy day categories padded more than they are now (b/c we just started YNAB the middle of March the big ones like car repairs and home repairs are still underfunded). While I do like getting those 3-paycheck windfalls every 6 months, right now it's more important for us to increase the monthly "available to budget" number due to an expected increase in monthly expenses for the next few years.

    This method might work well for you if your 3-paycheck month is coming soon.
  • DeguelloTexDeguelloTex Posts: 3,482Member, Beta Tester
    That's what I do. I'd rather not have available to budget be low 10 months and flush 2 months. It just works better for me to have the same budget except for the Holding category 12 months a year.
  • gabicatgabicat Posts: 5Member
    DeguelloTex,

    You are probably the one who gave me the idea if you posted about it recently. I was having a hard time figuring where to cut our normal 2-paycheck/month income so we could afford a substantial monthly expense increase...then I saw your post and the light went off in my head! So thanks for the idea. So helpful!
  • RoloRolo Posts: 297Member
    They are still paying five weeks of gas instead of four, but they know how to make it work on only the money they'd normally use for a 4 week month.
    Except that every month has 28-31 days in it, never 5-weeks' worth of expenses. I infer that difficulty switching from biweekly to monthly is only illustrating budget numbers that are too low in either the former or the latter or both.

    I'm trying to wrap my head around the 14-day fiscal calendar here as most expenses are monthly. The 'extra' paycheck twice annually falls under Rule 3 as they are atypical months.

    Perhaps this would help:
    - Treat expenses as known (mostly Rules 1 & 2)
    - Treat income as unknown until you have it in your hand; hence Rule 4
    - Expenses are either fixed amounts or an annual estimate divided by 12; budget accordingly
    - Keep a sufficient buffer to cover fluctuations in income and expenses (part of Rule 3)

    The focus begins with the known (monthly expenses), then the mostly known (non-monthly recurring expenses), then the anticipated (atypical expenses; i.e. repairs), then the unknown. Income isn't part of that since income isn't what but rather how much and you won't know that until the 1st of each month, whereupon you plan your next 28-31 days based on all known numbers (which now includes last month's income) and make broad course corrections once/month, leaving fine course corrections for when you spend/enter transactions (hopefully those occur simultaneously).
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