This step is a hugely important advance in getting control over your finances with the ultimate goal of moving away from living paycheck to paycheck and instead working towards a situation in which you live on last month’s income. Being one month ahead of your finances takes away a lot of stress and worries and gives a small extra financial cushion in your account. I’ll discuss the advantages and disadvantages of this practice first before looking at how you can implement this.
Being one month ahead essentially means that you are using last month’s income for your current month’s expenses. It means that you are ahead of your finances by having an extra month’s pay in your bank account. The money that you are earning this month won’t be used until next month.
The advantages of getting one month ahead
The biggest advantages of being one month ahead include:
- It doesn’t matter if you get paid 2 or 3 days late, or if a bill comes in earlier than expected.
- You don’t have to worry about going out next week instead of this week if you haven’t yet been paid.
- If a bill is larger than expected or budgetted, you don’t have to worry about not having the money and it gives you time to readjust your budget next month.
- Lastly, if you have a variable income, you can see a lower income month coming with some warning in order to make any necessary adjustments in your spending .
Disadvantages of getting one month ahead
Apart from advantages there are two main disadvantages to be aware of when getting one month ahead of your finances:
- If you keep your extra month in your regular bank account, your money can’t work for you as you won’t receive interest on it. One could argue that is a wasted opportunity as you could alternatively invest that money or put it in a savings account and get that money to grow instead.
- It can be tempting to use the extra money. If your monthly net wage is $2,000 and you get one month ahead, you’d have around $4,000 at the start of each month as soon as you get paid, although in reality you don’t want to use the extra $2,000 that you just received as they are for next month. It can be easy to spend more than $2,000 however as you’ve got it in your account anyway, so it is very important to keep your budget and stick to it.
The difference between getting one month ahead and an emergency fund
It might seem that getting one month ahead looks an awful lot like having another emergency fund for one month. They aren’t the same though. A very important difference is first of all that an emergency fund is for emergencies, your monthly budget of course isn’t. And although you don’t want to spend more than comes in, you don’t always control all factors, especially if for some reason your pay comes in late or a bill comes in early. Whether or not a bill is early or you’re paid late your bank of course doesn’t care about, and if you don’t have enough money, you either go in overdraft (which most likely costs you money) or bills get bounced, which likely also costs you. If you don’t have that extra cushion, by the time you notice it, it might be too late and even if you transfer money in from elsewhere that might take one or two days. These are not emergencies however, and you shouldn’t use your emergency fund for this as it can throw you off too much and you might not always end up filling it back up to your target amount.
A second reason why getting on month ahead is different from an emergency fund is that living paycheck to paycheck can be very stressful, knowing you have to skimp on the last few pennies for that month isn’t easy so ensuring that you have that flexibility is a huge stress reliever. Again an emergency fund is for emergencies only and has nothing to do with your daily living expenses even towards the end of the month.
Lastly sometimes your budget encompasses more than one month. Say for example you set aside $50 for clothes each month, but you don’t go shopping each month, instead you go shopping every 2 months knowing you have $100 to spend. Now imagine that for whatever reason one time you go shopping just a month after your previous shopping trip, meaning you have only $50 in your budget for new clothes, but run into the perfect pair of new boots that are on sale for $99. You know that you can use the $50 from next month’s budget already because you have that money available in your account.
How to get one month ahead
Just like when setting up your emergency fund, how you get one month ahead depends entirely on you, how you’d want to do this, and what your situation looks like. You might be able (and motivated enough) to achieve this in 3 months, but it might also take you almost a year. I’d say that aiming to achieve this in around 6 months is a good goal to aim for. Some ideas on how to get the money together include:
- Cutting expenses
- Using a bonus
- Doing overtime
- Earning something on the side
Step 74 – Get one Month ahead – in detail
- Write down a plan on how to get one month ahead. Don’t leave it at a vague notion of “I’ll save money for the next six months” as that is NOT going to get you to your goal. Write down how you’ll get that money, how much each month, week and what you will do each day or week in order to get there.
- Look back at your notes on how to put together an emergency fund as well as the ideas you generated in the steps on income to get some ideas for your plan.
- At the end of the week always review your plan, mark how you are doing and evaluate whether you need to make any further changes and adjustments.
- Keep track of your progress by indicating how well you’re doing with your goals and how close you are to achieving it.
Don’t stop or lose sight of your end goal which is living stress free on last month’s income. It might take you more or less time than you had originally planned, but when you get there, it will be so worth it!
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.