Using Toolkit "days of buffering" to determine Emergency Funds
I've been using YNAB for nearly 10 years, and have gotten used to all means of minor workarounds and whatnot, which still adheres to rules and keeps me on track and accountable. However, it's only been less than a year since I started messing with Toolkit and it's very cool. I like looking at both age of money and days of buffering as armchair metrics. While I'm not really paycheck-to-paycheck, and have no debt, and don't even CC float at all, I've always struggled with building an adequate Emergency/Income Replacement fund.
With various bonuses and windfalls I've been able to make some headway for maybe, 2 months worth in a single IR category. However, I do also work hard at building up some true/emergency expenses after having to raid some last winter when my dog needed $8k of emergency surgery. Now I have a situation with new fixed expenses and another windfall. Giving more details will turn this into a major TLDR, so my question:
How sound is it to use the days of buffering metric to determine my level of income replacement? To use the funds I'm receiving to both boost IR to let's say, 6 months, AND solidly fund all major true expenses (like home/car repairs, appliances, roof flies off, etc.) would leave too much idle cash, where I need to also generate income to cover the recent change in fixed expenses. Right now my age of money hovers around 100, and days of buffering is in the 80's. If I get my days of buffering to 180ish, would that be a sufficient "Emergency Fund" for most people or should I make sure my Income Replacement category is about 3 times as much as it is now?
Hope that makes sense. Thank you!!
I would figure out what 6 months of expenses actually is, rather than relying on Days of Buffering. Go through your budget and figure out which expenses you actually would have to (or want to) pay for and which other categories you'd still need to fund monthly in the event of income loss, add them together and multiply by 6. That will give you your answer.
Days of Buffering is projecting on your future what you did in the past, but that's not an accurate measure. It doesn't take into account what you are saving for now that you haven't spent yet (and isn't for emergencies), and additionally it will include spending that happened in the past that would not take place in the future in event of income loss.
Your Income replacement fund should be your income replacement fund. DOB will include your vacation funds, your new car fund, your family lifecycle events funds, your home maintenance and repair fund, (just some examples of large savings amounts that may sit in your budget) untouched.
You’re totally right, nolesrule , thank you. I just figured that stuff like vacation, car replacement, etc. would probably get raided or put on the back burner if there was a significant income loss. I think a good deal of my problem is I’m in the middle of a major financial change as my mom just passed away, and she took care of certain expenses of ours, but now I have an inheritance as well. I am trying to figure out how to budget out the next months’ expenses against the inheritance, while also developing a new investment strategy. Thankfully, I’m working with financial planners and investment advisors who I have meetings with this week.
I think with my meticulous ynab use over 10 years I should be able to continue holding the reigns. It’s just this period of loss and uncertainty is shaking my confidence, hopefully temporarily. I started keeping a forward projecting cash flow spreadsheet based on YNAB data and looking at the next 6 months is scaring the you-know-what out of me. But it is definitely keeping it real.
Oh, thank you so much for your condolences and advice. Don't worry, these are guys (through Schwab private client) that I've used for many years to help me manage my mom's affairs when she became unable to do so. At the same time I watched her sister and brother-in-law lose their whole retirement nest egg to one of the commission based investment advisors (that you're probably warning against) who put all their money in illiquid investments that went belly up. I actually found a lawyer for them and convinced them to sue, so they were able to recoup at least some losses through mediation.
While managing my mom's affairs through Schwab (and her spending in YNAB, of course), I managed our own retirement savings myself, in various accounts, diversifying every 3-6 months or so, etc. So I'm used to tracking both my budgeting and investment performance and expenses. If I don't like the way I see things going by next year, I will definitely consider a change.
What you describe Patzer is totally the spot I'm in right now, but my eyes are wide open. :)