Unexpected $945 budget-busting expense.

So I was making progress. Now I realize I failed to pay my 2018 taxes (e payment didn't go thru). So I have a $945 bill that I paid from checking---and that busts the budget.

 

Now, I will get a $1,000 state refund, balancing things out. But it will take a while, a month.

Do I lean on credit cards for the month? I don't see how to adapt to this shock.

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  • YNAB Advice: Negative budget $945 from one of your credit cards. This will free $945 to be budgeted elsewhere. It may cause that card’s category to go negative; that’s okay in this case. 

    Budget the money where you need it and do as much of your spending as possible using that card. If, at the end of June (aka Sunday) the card’s category is still negative, make July’s budget for that card equal to the negative. So if it is -654.32 on Sunday, you’ll budget -654.32 in July. 

    When you get the refund from the state, budget $945 to that credit card’s category. 

    Like 4
    • WordTenor Ah, I missed this one, somehow, and only saw your personal-savings advice. This is the answer I was looking for, if I didn't remember I had money to shift around.

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  • Personal finance advice: This is why almost every personal finance plan has you put some amount in emergency savings before trying to do anything else. If you had a small emergency fund, even of $500-$1000, this bite wouldn’t hurt so bad. 

    I would make your next move, beginning with the $55 that will be left from your state refund, setting aside a small emergency fund for the future. Many find that $1-2000 is appropriate before moving on to tackle other issues. That may take awhile if your finances are tight, but just because it’s hard doesn’t mean it should be neglected. You’re already using YNAB and that means you have the drive—you can do it!

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  • What would you have done if the e-payment had gone through?  Doesn't that mean you already had the money set aside?  Since you had the money set aside for the e-payment, can't you just repurpose that money? This isn't a new bill.  You should have already made plans to have the money available.

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  • I think I've figured this out. The fuller scenario is that I thought I'd pay (or had paid) the federal taxes by credit card, then simply pay it back when the MD refund came in. But for speed and to save fees, yesterday I paid the money out of my checking account, so it messes with my YNAB budget.

      I don't have a liquid emergency fund built up yet. I do have a $3k emergency savings in a mutual fund, but since it's accumulated over time, there are capital gains taxes for tapping it. I could have done that, though.

    Here's what I did: I am saving for a private-school tuition fee in December, and have $1,500 or so in there, so I'm just going to shift money from there till the MD refund comes back.

    I don't really see one could build up an emergency fund FIRST, before dealing with bills that are coming in regularly, if you have a tight budget and are still paycheck to paycheck.

    Long-term plan (this fall) is to sell the house and move to an apt, to get out of a heavy mortgage and recoup some equity. I'm recently divorced and unwisely kept the house.

    Like 2
    • Silver Lion Sorry, I missed WordTenor's first reply, which is the technical answer I was looking for (though I ended up not needing to do that).

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      • WordTenor
      • Can we agree that goals are dumb and immature? Sure.
      • WordTenor
      • 2 yrs ago
      • 1
      • Reported - view

      Silver Lion Glad you found the other advice! 

      The advice isn’t to build savings ahead of bills, but to build savings before dealing with debt, beginning to invest, etc. Whatever the big financial goal is, the first step is to have liquid savings. Pretty much every personal finance guru out there puts things in this order, though it looks different depending on the guru. The idea is, walk before you run.

      Your solution of pulling from another category is exactly right; your first thread made it sound like you were flat broke and had no other money that wasn’t needed right now. 

      With that being said, I would go ahead and cash out the mutual fund. You’re only going to pay capital gains on the gain. Nestle the $3000 in a high yield savings account (this thread is talking about a few good ones), make an account for it in your budget and budget it to savings, and you’re off to the races. 

      Condolences on the divorce, and feel free to ask for advice here as you need it. I’m super duper chronically single and love it, but there are plenty of folk here who have navigated amicably and not amicably separating the finances, and they have lots of wisdom to share.

      Like 1
      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
      • 2 yrs ago
      • 1
      • Reported - view

      Silver Lion 

      Silver Lion said:
      I don't have a liquid emergency fund built up yet. I do have a $3k emergency savings in a mutual fund, but since it's accumulated over time, there are capital gains taxes for tapping it

       First, it's good that you have resources and aren't so flat broke that you absolutely have to use credit card debt to finance the tax bill.

      Here's something to think about with respect to that emergency savings in a mutual fund:  If you are sitting on an unrealized capital gain, one of 3 things will happen:  1) When you sell, you will owe tax on the capital gain; 2) When you sell, the market will have gone down and you won't have a capital gain to pay tax on; 3) You never sell, your heirs get a stepped up cost basis, and taxes on any gains after your death are your heirs' problem to deal with.

      A common investing saying is, "Don't let the tax tail wag the investment dog."  If that $3K of mutual funds is an emergency fund, and you have a $3K emergency, you're going to need to cash it in and pay taxes on whatever gain there is.  OTOH, if the emergency is only $1K (about the size of your tax bill right now), you only need to sell $1K of the fund and owe a third of the taxes this year.

      Capital gains taxes are not the end of the world.  Sometimes it makes sense to sell the investment and pay the taxes.  But if the taxes get you to avoid selling when you have what is clearly a temporary emergency need for funds, perhaps this is not the best vehicle for emergency savings.  (There could be another discussion about market fluctuations, risk, and whether you are comfortable with the chance that you could lock in a loss if an emergency happens when the market is down.)

      I'm conservative.  If I'm going to have an emergency fund, it's going to be in something that is not subject to market fluctuation.  Part of that may include I-bonds, which share the characteristic that made you reluctant to sell your mutual funds; when I sell an I-bond, I incur a current year tax liability for all of the interest accrued since I bought the bond.  I'm okay with that.  If you're not, perhaps you should stick with things that you pay taxes on as the income/gain accrues over time, instead of things that generate no current taxes until sold and then hit you big.

      Disclaimer:  I am taking your statement that the mutual fund has a substantial unrealized capital gain at face value.  Lurkers should be aware that the typical mutual fund pays distributions of dividends & capital gains annually (sometimes more often), and that these are taxed in the year distributed even if they are reinvested in the mutual fund.  Reinvested dividends add to the cost basis of the total holding, in an amount equal to the amount added to income.  For example, if the original cost of the mutual fund was $2000, dividends were reinvested, and the current value is $3000, there is not a $1000 capital gain upon sale.  The capital gain is $3000 - $2000 - (total amount of dividends/capital gains reinvested).  In extreme cases, the mutual fund could actually have a total capital loss, if dividends paid over time exceeded the increased total value of the holding.  I mention this because many people do not understand taxation of investments in detail.

      Like 1
      • MXMOM
      • MXMOM
      • 2 yrs ago
      • Reported - view

      Silver Lion yes sometimes you have to pinch from a future expense you’ve wisely been saving for. My 2 are Christmas and taxes. I have a target goal balance set up in YNAB so I can automate the budget process but sometimes life happens so they are underfunded for the time being. 

      I read your concerns about saving an emergency fund while living paycheque to paycheque. Have you read any of Dave Ramsey’s stuff? It is a more structured approach that fits well within the YNAB flexibility. His baby steps help you focus. 

      Baby step one is $1000 emergency fund. He is anti credit card so this emergency fund is to keep you from reaching for the credit card if you have an unexpected expense. You can’t get out of a whole if you keep digging.  But there are actually a few things before baby step 1. First is to get current on all your regular expenses (mortgage or rent, utilities, etc). Then you budget based on priorities (which is what the YNAB category structure does as well). This is the 4 walls. Food. Shelter. Clothing. Transportation. I actually even question clothing unless you have growing children or you need clothes to get a specific job. Those you do first. Before credit cards. Before anything else. And then once you’re there (current on expenses and covered the four walls) you start squeezing every single budget to get $$$ for the emergency fund. No takeout. No hair appointment. No amazon prime. Squeeze squeeze squeeze. This is the hardest part. And you may find that the house is too much. But also could you take in a renter? Or something else to reduce the cost of the house? Maybe refinance the mortgage?  You will find that once you have that emergency fund in place and you stop living in overdraft (which is worse than paycheque to paycheque) your life will be so much smoother. But those first couple of months to turn the ship around are horrible. There are a lot of people here on the YNAB forums that can support you through it. Think of it as a financial detox. 

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    • Thanks. Very helpful. I have sort of gotten to this point, but only after digging a $4500k credit card hole. Even the tightest budget leaves no room (mortgage + utilities is 50% of my budget).

      Like 1
  • You  are right.  This was not intended to be an emergency fund. Just a slightly more liquid retirement fund. I should build up a true emerg fund.

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  • Do you have an emergency fund. You should have one of at least$1000. This is a Dave Ramsey baby step 1 but even if you don’t ascribe to DR it’s a good idea. We have a $1500 emergency fund which we’ve had to tap into a couple of times. When you get the $1000 state refund you can top up the emergency fund again 

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