YNAB You Need A Budget

[Ian]

I'm new so I'm sorry if this question has already been answered but I tried searching and couldn't find anything that did.

If I stick to my June budget, I will have a whole month's salary as a buffer for July which I think is a good start. That buffer will easily cover my regular monthly expenses with some left over for rainy day saving. As I see it there are several different categories of rainy day funds that you need:

1. saving for large annual bills with known due dates e.g. car insurance.
2. saving for large bills that you know will come but don't know when e.g. car repair bills.
3. saving for emergency funds to cope with serious disasters e.g. unemployment.
4. saving for short term large financial goals e.g. replacing your car.
5. saving for your long term future e.g. retirement.

I'm struggling to decide how I should allocate the available funds across these categories. They all seem important but I don't have enough income to do justice to them all.

#1 is how I got into a financial mess. The familiar story of building up large amounts of credit card debt because I didn't save for these expenses. Most of my annual bills are due within 1 and 9 months so right now I must save quite large amounts but over time, the amount I need to save will drop to 1/12 of the total freeing up more money for the other rainy day categories.

#2 is also essential if I am to successfully weather the normal financial storms of life. I've made what I think is a realistic estimate of my annual spend in this area and plan to simply put 1/12 of that away each month and hope that I don't get hit by anything massive in the short term. Is that sensible do you think?

So, rainy day categories #1 and #2 seem to me to be the essential steps I must take to avoid getting into a financial mess again. It seems to me that everything else is secondary. Is that the right way to think about it?

Assuming that I am thinking correctly, things get much more tricky for me after that.

#3 is essential because I have no savings like this at all so I feel quite vulnerable. I have one important #4 type event one year from now that I must save for. I have not been doing anything for #5 for quite a while. I know it is also essential but I've been so focussed on getting rid of credit card debt that I've put it on the back burner. I still use credit cards but have no residual balances and pay them off in full each month. I did however consolidate the original debt into a lower interest loan that will be paid off in 18 months time. This will give me back about 16% of my monthly income to save.

What I'm thinking of doing is to put the required amount away for my #4 project. Anything left into emergency fund building and deferring retirement savings until the loans are paid off.

Do you think this is a good idea or should I adopt a different strategy?

[Bee&Bea]

Hi Ian, welcome!

You have a good handle on prioritizing. It's hard to know where to start at first, since everything needs to be funded. The mandatory bills have to be paid, and you know when. Make sure those are covered in the time left before the bills arrive, plus your regular monthly bills. As for whether you do an emergency fund or car repair fund first, it's your call. You can start with an emergency fund that can cover car repairs or medical bills until you can make separate categories for each. The longer you are able to put money in without having to take some out, the more you'll have available when you need it, so at least put a little bit in every month. Having a cushion of money to help get through hard times will help you not feel so vulnerable and give you some peace of mind.

You know about your #4 project and when you'll need the money, so make sure to cover that as well. After you get things going well and have some money in the bank to help cover rainy days, you can start thinking about retirement funds again.

[INAB26]

I would personally make a list of everything upcoming that you absolutely know you will be spending and start with those rainy day funds first. Then put what's left into a more nebulous e-fund to start. Yes, it would be great to be dividing out all of those unknowns too, but you'll still be in a much better position to handle them than you have been before! Once you get caught up so that you're only having to set aside 1/12th of those known irregular expenses, then you should be in a better spot to divide the rest of those things out.

As for retirement, I think I would be leery of doing nothing at all, but obviously you do need to get a handle on immediate needs. How close are you to retiring? Can you get any kind of employer match? If you do get a match, I would try to get at least a little headed that way. Why turn down "free" money? GL!

[litterbug]

We discuss this all the time, because the way you choose to address those priorities is exactly what makes YNAB yours. As you’ve already understood, YNAB is a flexible tool, so you can approach the problem a myriad of ways. Some also use YNAB to implement specific personal finance systems like Dave Ramsey’s program or the concepts in Elizabeth Warren’s “All Your Worth.” I’ve cobbled together my own way, so I’ll tell you how I’ve handled it. It’s a long post, but maybe some of it will help you think about it.

First of all, though, congratulations on getting a quick buffer! It’ll make planning more straightforward, although you’ll still go through the exercise of figuring out how to prioritize your regular spending so it supports your goals. A buffer is largely a convenience, allowing you to budget at the start of the month instead of by pay period. But monthly budgetin can make it easier to see where money leaks from the budget, where you can cut spending without pain, and areas you thought were problems but aren’t.

To me, your #1 and #2 are what I think of as reserves. They’re not really rainy day funds, because if you plan for them, all they are is regular old expenses. Even car repairs and those big vet bills I know will come when my 19 year old cat finally starts getting sickly are predictable; all I don’t know is when and exactly how much, so my targets are pretty substantial for both. I never knew how much energy I put into worrying about these things until the anxiety lifted as soon as I set up those categories and knew I could handle them. I still call them rainy day funds because that’s our usual terminology, though.

#3: I have a $1000 mini e-fund, but I didn’t create that until I had substantial reserves and a buffer because budgeting biweekly drove me nuts. And because I had significant savings in #1 and 2, I feel much less vulnerable to the things that routinely threw me off. In adire emergency I could break my buffer, because the buffer is really a convenience, not savings. That’s my approach, anyway--I’m either buffered or not; even though unbudgeted money is shown in the software as a buffer for next month, for me it’s savings toward my buffer. In fact, my method for building a buffer was to have a separate category so I could segregate it from my money ‘available to budget.’

#4: I don’t have categories for these goals right now because paying off debt is more important for me. My car is pretty new, and I rent, which means not needing to replace a roof or remodel, and I’m willing to take my chances because my credit union has been very good to me. I’m also willing to take on a beater of a car if I need to. I also have no house hunger at all, having been a nomad and renter all my adult life, and not having a family to house. I might end up buying a condo when I retire, but I don’t think it will bug me at all to continue to have someone else be responsible for keeping my space livable.

#5: I’m lucky to have a state pension and 401k through my job. I put 5% of my income into the 401k, and after debt is paid off in a few years I’ll bump that up to 10% or more.

The one thing you’re missing in your list are discretionary ‘fun’ short and medium term goals. These are absolutely critical, in my mind. I need a season ski pass as much as I need anything above the absolute minimal groceries because the unparalelled joy of skiing is a huge part of what makes me me. Maybe more. So I started saving for that, as well as ski lessons and a little bit for a pair of used skis, as soon as I started YNAB. I didn’t focus on travel because I don’t travel far; most of my recreation is outdoors and involves car camping and day hiking within the state because I love it here. But you’ll see most YNABers budgeting into categories specifically for their hobbies and for travel to see family or just for fun right into their savings categories.

[Ian]

Bee&Bea, INAB26 and litterbug,

Thank you all for your replies and constructive suggestions. I wasn't set up to be notified of replies to my thread so I've only just seen them.

I think litterbug has hit the nail on the head — these priorities are personal decisions. I think I will go with my plan for now i.e. #1,#2, #4 and whatever's left into #3. Over time the #3 fund will grow to a mini e-fund, then to one month's income and eventually several months.

However I will read some of those books you referred to and review my plan in a few months when I will have some experience of living with YNAB to draw upon.

@litterbug, I do have a few "fun" categories that I regard as essential and they are in my #2 category

Thanks again.

Ian

[bookman413]

#s 1 and 2 are the good essential starts.

if after filling those tanks up , you have nothing left for #3 and #4, then you have a income reality issue.....but at least for the short to medium term you will have calm sailing. AND at least you'll have a realistic handle on the issue of your level , or lack, depending, of savings for unemployment and retirement.

Definitely fill up buckets one and two, in as itemized a way as is reasonable. If what's left after that is not much, then you have to either increase your income, decrease your expenses, make plans for doing so, or just pray and cross your fingers....but that's the reality.