YNAB You Need A Budget

[brad]

I get paid every two weeks, and this year August happens to be a three-paycheck month for me. It's also my first month of using YNAB. I'm in pretty good financial shape overall so I just assumed I already had enough for a buffer, but once I set up my budget in YNAB I discovered that I wasn't quite ready to start living on last month's income. But I was able to take advantage of this three-paycheck month to provide a kick-start in the right direction. Here's what I did:

I allocated my first paycheck, which came in early August, to income for September. That made things pretty tight, budget-wise, until my second paycheck arrived in mid-August, so I allocated that paycheck to income for August to get me through the month. My last paycheck arrives on August 31 so I'd have to budget that as income for September regardless. This will allow me to allocate my two paychecks in September as income for October, and I'll be implementing Rule 4 with a full buffer.

The tricky part for me is that my mortgage payments are also every two weeks, on the same day as payday. So while August is good because it is a three-paycheck month, it is also a three-mortgage-payments month.

I'm just tossing this example out there in case it's helpful for anyone who's trying to build up their buffer but finding it hard: if you're paid every two weeks, look in your calendar for any three-paycheck months and put them to use!

[HaploAW]

Awesome that you are getting an extra payday in the month!!! I unfortunately don't get those but would do the same as you are to build the buffer... Tax refund gave us a micro-buffer that at least allows us to schedule the major bills at the first of the month. We too just started YNAB. That micro-buffer helped with the stress of having to juggle bills with payday timings... I can't recall how many times my wife said "I can really pay *insert bill here* now??? We don't need to wait???". My response each time was "Check the category balance wifey o' mine. If the money is there, then you can pay the bill now. This YNAB is gonna change our lives!!"... Ok, maybe not word for word what I said but I did keep referring to the category balances have your answer, not I.... LOL.

Congrats on finding YNAB like we did. Hope your journey allows you to build those rainy day pots up before Murphy decides to knock them over!!!

[LindseyinWa]

We also started in August and have the same pay schedule. What we've done is break our monthly expenses into first half (A) and second half (B). So, then I assigned each (future) paycheck to it's part of the month.

Paycheck Date - Spending Period

Aug 30 - September A
Sep 13 - September B
Sep 27- Oct A
Oct 11- Oct B
Oct 25- Nov A
Nov 8 - Nov B

Do you see how I'm getting ahead? On August 30 I'm getting the paycheck 2 days before I need to use it. By November 8 I'm 7 days ahead. By January 31st we''ll have a 15 day buffer, and in one year we'll have a 30 day buffer. That's without actually trying to "build" the buffer - it's just by stretching our paycheck out to 15 day periods instead of 14 day periods. {We are going to use this method to achieve our buffer because we have so many other things that desperately need our nickels and dimes...August 1st 2013...that's FULL BUFFER DAY!)

Your "extra" mortgage payment will also happen every 6 months. If it happened in August, it will happen in January, so you have 10-11 paychecks to fill a rainy day fund for your extra mortgage payment. (mortgage pmt /10)

[cecekingskid]

Awesome idea, LindseyinWA! I've been trying to figure out how I was going to build my buffer with needing the majority of my surplus cash to go to my debt snowball. This idea makes perfect sense. I love it and I'm implementing right now and will start with my Aug 29th paycheck.

[jessiebird]

We get paid weekly so we get four extra-paycheck months a year, August being one.

We have used two of those extra paychecks to fund the buffer but we used the last one for debt, and probably will with the next one as well. The half-buffer puts a nice cushion in the bank and takes the pressure off the timing of things. But the extra cash is such a nice chunk to put down on debt it's hard to resist.

[brad]

Your "extra" mortgage payment will also happen every 6 months. If it happened in August, it will happen in January, so you have 10-11 paychecks to fill a rainy day fund for your extra mortgage payment. (mortgage pmt /10)

I also really like your system -- very smart!

As for the extra mortgage payment, thanks for working this out for me. Although in reality my next three-paycheck/three-mortgage-payment month isn't until March, because I get paid on Fridays...the third January paycheck falls on February 1.

I have all my mortgage payments set up as recurring events in my calendar, but it didn't occur to me that when budgeting I need to look at next month so I can be sure to budget for the right number of payments. YNAB really does entail a different way of thinking, and I'm still getting used to it. Pre-YNAB I managed my finances the way most people do: from an accounts perspective. My mortgage payments are withdrawn automatically from my savings account, so I just made sure I kept enough in my savings to cover at least two mortgage payments (providing a sort of built-in buffer), and every time I got paid I transferred a mortgage payment's worth of money into my savings account plus enough to contribute toward whatever savings goals I was working toward. I still do that, but now I have to account for it in my budget and it requires looking at it from a different perspective.

[DonGately]

The three paycheck months are a great boost. Our next one doesn't come until November but as you continue using YNAB, get a buffer built and your finances under control you'll get to like the extra paycheck months even more as you'll find YNAB has really freed that money up for things like building rainy day funds and being able to make the "extra" check a true extra.

[Tif_Ann]

I agree, the three-paycheck months are great for building a buffer, and if you can also chip away at your previous paycheck by budgeting well you can be buffered even faster

For the mortgage: another thing that many people recommend is taking your 26 payments, totalling them up, and then dividing that by 12 to find out what your "monthly" mortgage payment would be. If you save THAT amount every month, when your next 3-payment month comes around you should have enough in the category to pay it without having to budget an additional payment. In numbers, it looks like this:

26 payments (every 2 weeks) of $150 = $3900 (average of $300/month, with 2 months having an extra $300 payment)
12 monthly payments = $3900/12 = $325/month or an extra $12.50 each pay period set aside

Obviously no one has a $300/month mortgage payment, but the numbers work well. Even if the mortgage payment is $500 every two weeks, you only have to set aside another $85 or so every two weeks to save up that extra payment every six months.

[blackdiamond]

Here's another way to look at and handle your mortgage.

Example 1: 30-year loan for $300,000 @ 5% interest = $1,610.46 monthly payment & $279,767.35 in total interest (Excel)

Example 2a: 30-year loan for $300,000 @ 5% interest = $742.93 26 payments per year & $225,843.18 in total interest (Excel)

Example 2b: 30-year loan for $300,000 @ 5% interest = $805.23 bi-weekly payment & $226,466.56 in total interest (Online Calculator)

Example 3: 30-year loan for $300,000 @ 5% interest = $1771.46 (10% extra) monthly payment & $221.009.23 in total interest (Excel)

*Note: I'm not sure why the Excel results above for the 26 payments per year are slightly different from what I got using an online calculator for a bi-weekly loan.

My point is that there's more than one way to skin a cat. I pay extra on a monthly basis because I don't have to make multiple payments and my original mortgage company actually charged a fee for bi-weekly payments. I would suggest considering paying extra each month and then using the "extra" paycheck to fund other things.

Disclaimer: I would suggest that you use your own Excel calculation or online calculator to compare your specific numbers. I have looked at this stuff in the distant past, but only evaluated the one set of criteria for this post. It seems that paying about 10% extra monthly generally is slightly better than paying bi-weekly.

[blackdiamond]

p.s. if you're "saving" money in a rainy day category to fund the extra payments then you're allowing interest to build on your mortgage and we all know how compounding interest works.

[brad]

For the mortgage: another thing that many people recommend is taking your 26 payments, totalling them up, and then dividing that by 12 to find out what your "monthly" mortgage payment would be. If you save THAT amount every month, when your next 3-payment month comes around you should have enough in the category to pay it without having to budget an additional payment.

I like that idea too. The only downside I can think of is that there may be some opportunity cost to tying up the extra amount (an extra $200 per month in my case) every month when that money could be free to do other important jobs that might come up in particular months. But in those months I suppose I could just not budget the extra-payment money and double the amount I budget the following month.

[brad]

My point is that there's more than one way to skin a cat. I pay extra on a monthly basis because I don't have to make multiple payments and my original mortgage company actually charged a fee for bi-weekly payments. I would suggest considering paying extra each month and then using the "extra" paycheck to fund other things.

So you're saying set up monthly payments with the bank but pay extra toward the principal with each payment instead of paying every two weeks?

That's an interesting idea. I'm on an "accelerated biweekly" payment scheduled, which had the lowest cumulative interest payment of all the options my bank provided, but I didn't consider the pay monthly with an extra payment option. I'm allowed to pay up to 25% of the original mortgage amount each year without penalty, whether as lump-sum payments or as extra payments on the principal each month. We usually do a big lump-sum payment every year; we have a 15-year mortgage and should be able to pay it off in 10 years or less.

[YYC27]

That's an interesting idea. I'm on an "accelerated biweekly" payment scheduled, which had the lowest cumulative interest payment of all the options my bank provided, but I didn't consider the pay monthly with an extra payment option. I'm allowed to pay up to 25% of the original mortgage amount each year without penalty, whether as lump-sum payments or as extra payments on the principal each month. We usually do a big lump-sum payment every year; we have a 15-year mortgage and should be able to pay it off in 10 years or less.

The "accelerated biweekly" option is mathmatically the same as taking a monthly payment and increasing it by 8.33% (or close enough ... there's a slight advantage to biweekly because of how the compounding works, but that only accounts for a few months off the standard amortization). If someone were maxing out every other prepayment option, it's one more way to shorten your amortization without penalty.

I find it convenient to pay my mortgage biweekly, because I'm paid biweekly, and budget on that basis.

[Will]

26 payments (every 2 weeks) of $150 = $3900 (average of $300/month, with 2 months having an extra $300 payment)
12 monthly payments = $3900/12 = $325/month or an extra $12.50 each pay period set aside

Obviously no one has a $300/month mortgage payment, but the numbers work well. Even if the mortgage payment is $500 every two weeks, you only have to set aside another $85 or so every two weeks to save up that extra payment every six months.

If 12 payments of $300 are $3600, than $3900 is only one extra payment.

[smallLife]

Now that I'm fully buffered my 5 paycheck months get split: a little bit of fun money (I normally keep money tight), building rainy day funds in one fell swoop, extra retirement, and debt payoff. The split varies each time, and not all of the categories get money, but those "extra" paychecks certainly help me get where I'm going faster. I pay my mortgage monthly so that's not an issue for me. I'm about a month ahead right now and pay a little bit more than the minimum.