Getting a month ahead and age of money

I just watched the "getting a month ahead with your money" YouTube video that was in the weekly round up email and got a bit confused, I thought I would post here rather than make a comment on the video.

I genuinely never realized what "getting a month ahead" meant, my "age of money" is 169 days right now however I never budget immediate expenses a month in advance (e.g. I get paid on the 25th of May, on the 1st of June I allocate from that income my monthly mortgage payment and then it gets taken almost immediately on the first working day of the month, then the available in my mortgage category sits at zero until the 1st of July).

Surely being a month ahead and age of money should be correlated in some way, if my AoM is high should I still be aiming to get a month ahead? I can't work out if this is just a mindset thing or not and I am just thinking about things in a different way to the YNAB method. 

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  • AOM is a backwards looking metric that only looks at spending that has already happened. Getting a month ahead is about a plan for the future. If you were to lose your job, your AOM would continue to rise as you get further and further away from your last income event, all while your accounts are being spent down to zero - AOM tells you nothing about your financial health. 

    Like
      • Pale Tiger
      • @Whut
      • Tan_Tiger.4
      • 6 mths ago
      • Reported - view

      Thanks for the reply - This is where I am definitely getting confused. I thought AOM of 169 means I am spending money I earned 169 days ago, doesn't that mean if I lost my job today, I would essentially have the last 6 months of income that I haven't spent yet, because I'm only spending money earned 169 days ago?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
      • Reported - view

      Pale Tiger Here is my AOM (Blue) vs. Money in my Budget (red) since starting YNAB back in 2014. I want to focus on the information inside the red oval. In July 2019 my AOM was 300. In August it dropped to 173. But you can see by the red line that there was only a small drop in the money in my budget, about 2.8% decrease.

       

      So what do you think happened?  

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  • Pale Tiger said:
    I thought AOM of 169 means I am spending money I earned 169 days ago,
    Pale Tiger said:
    doesn't that mean if I lost my job today, I would essentially have the last 6 months of income that I haven't spent yet, because I'm only spending money earned 169 days ago?

     Nope. It means the average of the last 10 outflows was from money 169 days ago. What if that last outflow had consumed every dollar you had? Hint: You can enter a fake transaction to find out.

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      • Pale Tiger
      • @Whut
      • Tan_Tiger.4
      • 6 mths ago
      • Reported - view

      I have no idea what your graph is showing, what does "money in budget" mean on a scale of 0 - 400? It can't be dollars... I'm a little bit color blind as well, do the red and blue lines cross over, so your age of money is higher than your "money" line? Nope, I have no idea whats going on there.

      I also don't understand your question "what if your last outflow consumed every dollar you had?" surely it wouldn't matter how you are budgeting if a transaction literally cost you every dollar you had? E.g. if you get 3 months ahead in your budget, every dollar you have is still every dollar and now you have no money for groceries?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
      • Reported - view

      Pale Tiger 

      Pale Tiger said:
      I have no idea what your graph is showing, what does "money in budget" mean on a scale of 0 - 400?

      The 2 lines are using different scales The scale on the left is AOM. I have a scale on the right in dollars for Money  in my budget that I cut off, since I don't want to tell you exactly how much money is in my budget (and it's not relevant for this discussion and analysis). The important point is the trending differences between the two lines. They don't match up.

      My AOM dropped 42%, but I only had a net decrease of 2.8% of my money.

      Pale Tiger said:
      I also don't understand your question "what if your last outflow consumed every dollar you had?" surely it wouldn't matter how you are budgeting if a transaction literally cost you every dollar you had?

       My point is that if you spend all the money in the budget, the AOM doesn't suddenly drop to zero at the moment of the transaction. So the point is that AOM doesn't tell you that you currently have  X days of money. If it did, then my AOM would have dropped 2.8% in my example rather than 42%.

      Furthermore, if your income suddenly stopped and you had to live on what you have, spending it down over time, your AOM would continue to increase as you get further away from the last time you received income, even as the money in your budget continues to decrease.

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      • Pale Tiger
      • @Whut
      • Tan_Tiger.4
      • 6 mths ago
      • Reported - view

      nolesrule I guess I don't understand the behavior of AOM at all, how can it be the number of days you held money before spending it if it isn't affected by spending? 

      I guess I didn't consider how once income stops that means you have no income to spend so the day your AOM is measured from is your last paycheck, I guess I expected AOM to drop as you spent older cash and moved towards "younger" cash

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
      • Reported - view

      Pale Tiger 

      Pale Tiger said:
      I guess I don't understand the behavior of AOM at all, how can it be the number of days you held money before spending it if it isn't affected by spending? 

       It tells you how many days you held the money you've recently spent, but doesn't tell you how many days you've held the money you still have. Your next transaction may come from a different dated pool of income, but you won't know it until after the transaction has happened. The fact that YNAB averages the last 10 transactions also reduces the magnitude of the transition between pools of income.

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  • The problem is your True Expense contributions will increase Age of Money, but it doesn't get you ahead. (It only keeps you from falling behind.) Additionally, sinking further into debt will increase Age of Money, but it doesn't get you ahead. (It obviously goes the other direction.)

    As for your thought that you can last 169 days if income stopped, consider that you immediately pay a substantial True Expense. Oops, there goes your 6-month "safety net".

    Honestly, if you want security against income loss, grow an Income Replacement category. If that is 6x your monthly income, you can obviously last for 6 months at your current lifestyle.

    Like 3
  • Pale Tiger said:
    should I still be aiming to get a month ahead?

    In my opinion, you should aim to push all your income into next month's area. This lets you budget in month-sized chunks in a cycle aligned with your expense recurrence. This makes planning extremely easy. Don't go beyond that, because that throws away the process advantages you just achieved (and it's more work).

    As a completely separate consideration, grow categories toward the likely "emergencies" -- which really aren't with adequate planning -- to give insight into your ability to handle multiple, near-simultaneous events. Income Replacement, Medical Deductible, Auto Deductible, Household Repair, Auto Repair, Auto Replacement, etc.

    Like 2
  • Pale Tiger said:
    I get paid on the 25th of May, on the 1st of June I allocate from that income my monthly mortgage payment and then it gets taken almost immediately on the first working day of the month, then the available in my mortgage category sits at zero until the 1st of July).

    This is exactly what I would recommend, assuming your entire monthly pay is received on May 25. So what the Mortgage category sits at $0 the rest of the month? Those dollars did exactly what they were meant to do. Repeat next month. (Ideally, you would set yourself up with a way to remember and quickly enter your nominal values. Using goals and scheduled transactions is one way of doing that.)

    As long as you continue to be paid, this system continues to work perfectly. If you happen to lose your job, you simply move $X from your Income Replacement category -- which you fortunately had the foresight to grow in advance -- to TBB and go on about your business.

    Like 1
      • Pale Tiger
      • @Whut
      • Tan_Tiger.4
      • 6 mths ago
      • Reported - view

      dakinemaui Thanks for your response. This is still where I get myself really turned around, yes I get paid once a month on the 25th, and that sits in income to be budgeted until the 1st of the next month when I fully allocate it across my categories. 

      That payment is for the work I did for the entirety of May, and I am allocating it across categories in June, but it doesn't feel like being "a month ahead" as I understand the definition from the recent Youtube video - the money isn't in my budget until it hits my bank on the 25th so how could I have allocated/spent it before then?

      That being said, the reason why I was wondering if this was a mindset thing, and the interplay of AOM and "being a month ahead" was because I have an Emergency Fund that is about 4 months of immediate expenses, and also long term savings goals for things like vacations and home improvement that could be re-purposed if I got into difficulty.

      This is where I got myself in a spin, and wondered if "being a month ahead" and "emergency fund" were really just the same thing but with a different mind set attached. I thought the savings were driving the higher AOM, and that basically I am more than "a month ahead" but rather than have 2 months of money allocated to the "mortgage" category, I'd just reallocate from emergency fund if I lost my job. 

      Now I don't know if I really understand what AOM is...

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      • dakinemaui
      • dakinemaui
      • 6 mths ago
      • 2
      • Reported - view

      Pale Tiger I feel being ahead is very different from an emergency fund. The EF is a source of "extra" funds for unanticipated expenses. Being ahead, on the other hand, you are planning on using every penny of those funds. Now, it's true that if you're ahead (which requires savings), you can use them in the event of an emergency, but then you obviously lose the benefit of being ahead. This is no different than using your Vacation savings in an emergency and not being able to go on vacation.

      There's no way around the fact money can only do one thing at once. Feel free to change its job, but there are always consequences to doing that.

      Age of Money is ONLY how long you've held your money before spending it. It is most certainly NOT a measure of how far ahead you are. (That's a common misunderstanding, so don't feel bad.)

      Like 2
      • Pale Tiger
      • @Whut
      • Tan_Tiger.4
      • 6 mths ago
      • Reported - view

      dakinemaui I still feel like this is mindset rather than an actual difference - if I build up a buffer of 1 month of the cost of my mortgage in the mortgage category, if all goes well I fund that category by 1 month of cost per month and the extra month is just in case of, well for want of a better word, emergency. Once you've worked hard to establish the cushion, you would only let that cushion go if you absolutely had to, and to keep the cushion you can't spend it?

      You said income replacement as a category before, this is no different to my emergency fund by a different name I guess, other than there are a few more things I would consider using my emergency fund on if I had to, other than just income replacement.

      I understand if you are making the distinction between emergency funds and true expenses, I also fund my "known" one off, large, erratic, unknown timing expenses via true expenses as well as having an emergency fund.

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 6 mths ago
      • 1
      • Reported - view

      Pale Tiger Forget AOM. Really. Let your budget define where you are. If you have an EF of 4 months of expenses, then you are 4 months ahead. End of story.

      One caveat is that you also have your Rule 2 true expenses covered as well so they wouldn't have to be taken from your EF.

      Net Worth is the real scorecard for how you're doing.

      Like 1
      • dakinemaui
      • dakinemaui
      • 6 mths ago
      • 2
      • Reported - view
      Pale Tiger said:
      You said income replacement as a category before, this is no different to my emergency fund by a different name I guess, other than there are a few more things I would consider using my emergency fund on if I had to

      And that last thought is why I draw a distinction. Making spending decisions in line with your priorities is the very essence of YNAB. Let's face it, all "emergencies" are not created equal.

      You don't put your cell phone bill money in your Grocery category, right? Doing so risks coming up short on whichever comes second.

      My Income Replacement has a different priority than other things. It therefore has it's own category. This allows me to make priority-based decisions whether I will or won't use those funds. 

      Like 2
  • Pale Tiger said:
    wondered if "being a month ahead" and "emergency fund" were really just the same thing

     The thing that YNAB needs to decide is what "being a month ahead" really means. 

    Consistently budgeting money earned last month is one thing.

    Funding true expenses is another thing. 

    Consistently spending money earned last month is another thing.

    The first thing (called Classic Temporal Buffer because it used to be prominent in YNAB) gets you ahead of your budgeting because it breaks the paycheck to budget cycle, allowing you you see the big picture at once, save work in the software, and gives you extra time to react to changed in your financial situation (aka - priorities and plan).

    The second thing (called True Expenses) gets you ahead of the large expenses, preventing debt when the unexpected things of life hit hard. 

    The third thing (AoM) doesn't do much except tell you when you can't do the first and second. And give you a false sense of security.

    To know if you're "getting ahead" financially, look at your budget category balances (for the True Expenses mentioned above) and whether you're able to separate income events from when they are needed in the budget (not your cash-flow).

    I think it's highly inconsistent and irresponsible of YNAB to tell users AoM has anything to do with budgeting, when it's really a side effect of transactions. 

    YNAB's power comes from looking at the budget to see how you're doing (and inform spending), not from looking at accounts. AoM looks at accounts, so it's a contradiction to the method to use that calculation for anything meaningful.

    Unfortunately, they mismatch accounts and transactions implications with budgetary and category implications in their current definition of getting ahead. It's logically inconsistent. 

    Like 3
  • Here is another fun AOM graph. I went looking for my highest AOM in the 6 years I’ve used YNAB. 

    It went from mid 70s in January of 2014 to 293 in November. Why? Because I lost my primary source of income in January and didn’t land a job which paid more than 200 dollars a week until November. 

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      • jenmas
      • jenmas
      • 6 mths ago
      • Reported - view

      WordTenor here is my AOM rising during 6 months of unemployment (job ended Sep 30 2015, started a consulting gig mid March 2016, but didn’t get my first invoice paid until April).

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  • Thanks all, this is an interesting/still confusion discussion, I think the main take away from it is that AOM is pointless?

    Like 3
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
      • 1
      • Reported - view

      Pale Tiger Now you're getting it. YNAB tried to come up with some fancy proprietary metric that would sum things up for them in a single gamified number, but the math doesn't support what they were hoping the metric tells you.

      Like 1
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 6 mths ago
      • 2
      • Reported - view

      Pale Tiger Yes, you got it. Think about this.  What if you are budgeting next month with this month's income, have all true expenses covered, have a flush Vacation fund, have a full 6 months of income Emergency Fund (or Income Replacement fund, whatever you want to call it), etc.

      Now you start investing $1000 a month into your Vanguard investing account. This $1000 a month is leaving your budget. Do you think that will increase your AOM or decrease it? Are you in better financial shape or worse by investing $1000 a month? How will AOM and your Net Worth compare over time?

      Like 2
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