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.
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.
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.
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.
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.
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.
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.