On-budget or off-budget Savings account

Hey guys

I’m torn between using an on-budget account vs an odd-budget savings. It seems like an on-budget savings account isn’t more time consuming and more potential for errors. What do you guys think?

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  • I recently had an issue with onbudget savings account that did finally get resolved. 

    In some ways if you plan to use your savings account only as an emergency fund, then you might not need it as an on-budget account. I once considered that, because it gets confusing for me how YNAB recognizes checking to savings transfers. So by having the savings offline, you can simply transfer money from your savings to your checking, and then budget that money as needed. 

     

    Oh the other hand, an on-budget savings account gives an overall report of your wealth.

    I look forward to the feedback of others on this question. 

    Reply Like 1
  • By having the account on budget you are doing a few good things to make your life easier:

    1) Giving defined purposes for money in the account, giving you a better way to plan with your money. Having a savings account not in the budget just means it's a big pile of money with no purpose. And when you do that, you start giving it multiple purposes in your head.

    2) Removing the necessity of keeping money for specific purposes in specific accounts, making your budget easier to manage. Sure, you could split the money in the savings account into multiple savings accounts, one for each purpose, but then you're just creating extra real world accounts to manage when the same thing could be accomplished within the categories of your budget and no additional accounts (this is true for accounts both on and off budget). You can move money around freely between any accounts that are on budget, maybe because you want a little better security from fraud or to take advantage of changes in interest rates at various financial institutions.

    3) Removing the categorized transfer issue from the equation, making your reports more accurate when it comes to actual spending. With an off-budget account, the money sent to the savings account leaves the budget, and must be categorized, just like spending. And if you bring money back into your budget from the savings account, you must also categorize it. And then when it leaves the account from being spent, you categorize it a third time. This then impacts all of your reports and can make a mess.

    Read the following: The Relationship Between Your Budget & Your Accounts: It’s Complicated

    Reply Like 5
  • Don't keep your savings account off budget. 

    There's actually nothing to debate. 

    I say that as someone who was certain I had Reasons(TM) why my situation was special and my needs were different and of course my savings account belonged off-budget. After a year, I wound up spending hours one evening bringing it on budget and adjusting 14 months of budgeting so that it was on budget from the start.

    Don't  keep your savings account off budget. Learn to use the budget instead. Once you understand how the budget works, having your savings off budget will be an annoyance and a hindrance. 

    Reply Like 2
  • So when do you transfer money that you budgeted to savings, to your savings account?

    with regular budgeted categories when you budget money for it and spend money in that category, the available balance goes down. This necessarily isn’t the case with savings 

    Reply Like
      • WordTenor
      • Arranged the menu, the venue, the seating.
      • WordTenor
      • 1 yr ago
      • 2
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      Purple Vacuum Never. And always. 

       The budget determines the purpose of the money, the accounts determine its location.  Your categories have now become your new accounts.  When you want to save money, you'll do that by adding more money into a savings category.  This is entirely independent of whether or not the money is in your savings account. But the same principle applies: just like when you were separating your money between checking and savings, the money being in your savings account prevented you from accidentally spending it on something you use the checking account,  now, the fact that the money is not in a category that you use for spending will mean you won't spend it because you'll be relying on the category balance to tell you how much you can spend. 

       Periodically, you'll probably end up with too much money in an account that doesn't pay much interest.  Or you'll realize that you want to buy a big thing, and that you don't have enough money in the checking account to pay for it  even though you've been diligently saving up for it, and there's plenty of money in the category. So you move some money back-and-forth between your accounts. But this is independent of the categories. The categories won't change. 

       The practical answer to your question is, whenever you feel like you have too much or too little in a given account, you'll move money to a different account. After five years, I assess my balances  about once a month when I am doing my budget,  but I actually only move money maybe every other month or once a quarter or so.  When I first started, I kept most of my money in my checking account, because I was pretty close to the bone  and my savings account didn't pay very much anyway. 

      Reply Like 2
    • WordTenor are you suggesting that in order to simply it i should just keep all of my funds in my checking account and let my budget decide their purpose? 

      Reply Like
      • jenmas
      • jenmas
      • 1 yr ago
      • 2
      • Reported - view

      Purple Vacuum My paycheck is deposited into checking account #1. I don't particularly like checking account #1 but I'm too lazy to do anything about it. My mortgage, condo fees, and HOA come out of this account because this is how I set it up when I bought my place. I pay my housecleaner out of this account. When I get cash out of an ATM (usually only once per quarter) this is the account that it comes out of. Therefore I like to keep this account at 2x(Mortgage+CondoFees+HOA). Every time I get paid, anything above that amount gets moved to either a high interest savings account or to the online checking account #2 that has a decent billpay interface. I know that I need to keep approximately $Y in the online checking account #2 to cover my credit card bills. So when I move money out of checking account #1, I first make sure that checking account #2 gets topped up to $Y and then everything else goes to the savings account.

      Where is the money that I have saved up for a trip to Hawaii? I have no earthly idea, because I also have checking account #3, savings account #2, savings account #3, Wallet Account, Euro Account, Gift Card Account, Emergency Cash Stash account, and a CD ladder plus all my credit cards as on budget accounts. The location doesn't matter except on the day that I need to pay my credit card bills (well, and on the days when I get a pedi at the place that charges less if you pay cash, so I have to have that on hand) and since all of my credit card payments are due between the 22nd and 29th of the month, I know when I need to get money into online checking account #2.

      Reply Like 2
      • WordTenor
      • Arranged the menu, the venue, the seating.
      • WordTenor
      • 1 yr ago
      • Reported - view

      Purple Vacuum That is the most straightforward solution, but ideally, you want to earn as much interest as you can on money that you don't need to use soon. So you'll want to keep some, and over time as you build up savings categories in your budget, probably most of your money in a savings account. 

      There's not a hard and fast answer to how much you should keep where (and importantly, it is not related to your category balances). A good rule of thumb is to have about a month's worth of spending in checking, since you'll get paid over the course of the month and that money will replenish. But many people are able to get away with less, sometimes, much less. 

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  • I think what I will do to simply this whole thing is to just Combine checking and savings and just use one account since looking for “interest” is unfruitful given our current economical environment. 

    I have a brokerage account right now with around $30k in it right now that I didn’t link to YNAB nor will I ever. The same goes for my 401k. 

    But what I will do is combine my checking and my savings, so that I don’t have to worry about transferring to-and-from my savings when I ‘budget’ for it. And once I build up my Savings over $5k then I will move that tranche over to brokerage. Then rinse and repeat. Fill up $5k —> move over to brokerage account out of YNAB. 

    My concern hasn’t been that I’m living paycheck to paycheck (I guess we all are in some capacity) but rather control my spending in a more calculated way. This is the reason I love YNABs credit card payment feature. I’ve always spent on credit card and paid off but had a hard time controlling my money in relation to my budget. 

    How does that plan sound? 

    Reply Like
      • jenmas
      • jenmas
      • 1 yr ago
      • 2
      • Reported - view

      Purple Vacuum my approach to finances is that if I'm going to have to spend the money in the next five years it needs to be in a checking account, a savings account, a CD, or perhaps an I-bond. My investment account is for stuff way down the road because I wouldn't want to risk there being an emergency and having no choice but to withdraw from it in a down market.

      Reply Like 2
    • jenmas okay I can respect that. I on the other hand think all signs point to a strong economy for the next couple of years and want to take advantage of that. Take our viewpoint aside as it relates to storage of funds - does the idea of me combining checking and savings into one account for purposes of using YNAB make sense? Because in a way YNAB allows you to earmark every dollar for a job. And you could essentially have one single account that you operate out of, as YNABs envelope based budget philosophy allows you to have multiple envelopes acting as their own account, if you will - without physically creating new bank accounts 

      Reply Like
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 yr ago
      • 1
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      Purple Vacuum I agree with jenmas although I might use a Money Market fund in a brokerage account for on-budget savings. However, if I were to do that, it would be a separate account from my long-term investing and would be considered as a savings account rather than an investment.

       

      Every category in your budget is for spending. Some of it is current, some of it is for 6 months from now, some of it is in a year, some 5 years, some of it is for stability (Income Replacement Fund which might be tapped today or never). Only money that has no purpose goes into volatile investments.

      Reply Like 1
    • nolesrule to put things in perspective of why anyone at this time would utilize a savings when the APY is 0.01% at most institutions. A $50,000 balance would yield a $5 return annually - hardly worth the inconvienence. At a 0.25% APY your annual return is $125 - a little better but adjusted for inflation and cost of living hardly worth our time. 

      I like the idea of betting on the market (and history would say that’s right) so I put my money in ETFs that track indexes rather than investing in individual stocks, a safer and more reliable return historically.  My bet is on the US economy and world economy 

      Reply Like
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 yr ago
      • Reported - view

      Purple Vacuum My primary financial institution has a 1.60% APY on the savings account for balances over 10k.  That's up from 1.0% APY in the last 6 or so months You might wish to reconsider your financial institution, at least for savings accounts.

      I invest in index funds as well. My brokerage account consists of Vanguard Total Stock Market and and Vanguard Total International Stock market index funds. But I'm not betting the money earmarked to replace my wife's car or pay for my kids' bat mitzvahs or my Income Replacement money in those funds, because that money may be needed regardless of the condition of the stock market.

      One thing to consider is that stock market crashes happen without warning, and we're in one of the longest bull markets in history. It's best to formulate a plan that is appropriate for both continued growth but also unexpected decline, rather than betting it all on continued growth, which ignores the risk.

      Reply Like
  • Purple Vacuum said:
    . I on the other hand think all signs point to a strong economy for the next couple of years and want to take advantage of that.

     As long as you have a plan for what happens when you need to spend the money but it's not there due to an unexpected downturn (bear market, crash, etc.) then that's fine.

    Hope for the best, plan for the worst.

     

    Allocation budgeting doesn't work very well when the total value of your budget is volatile. You can always hold more in cash for your budget and increase the risk in your investments.

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  • So one of the benefits of YNAB is the ability to really use one account for multiple purposes though? By the way the checking account I am using at the respective institution has an APY of 0.20% so it’s not like it’s not earning some form of interest/return 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 yr ago
      • Reported - view

      Purple Vacuum I don't consider that a benefit, I use multiple accounts to increase the return on the money I don't want to put at risk. I have a checking account, a couple savings accounts, several CDs and I Bonds held at treasury Direct in my budget.

      Reply Like
      • WordTenor
      • Arranged the menu, the venue, the seating.
      • WordTenor
      • 1 yr ago
      • 2
      • Reported - view

      Purple Vacuum I would say the benefit of YNAB is the ability to maximize the efficiency of your accounts without sacrificing your ability to have discrete purposes for your money. You are able to keep money in Account A because Account A provides some sort of benefit (high interest rate, easy access to another account, a good bill pay system, no foreign exchange fees, etc) and not because the money is sequestered arbitrarily to "save" or to "spend." 

      For example, I budget for my car payment every month. It is auto withdrawn from my savings account at the credit union that holds the loan, which is the only way they will do an automatic payment. But instead of transferring the payment to the savings account each month, I front-load the account with $1000 every quarter. It's just easier to only deal with that account once every three months instead of the 25th of every month.  But *technically* some of that $1000 is budgeted to other categories, because only $300 at any given time is budgeted for the car. But it doesn't matter, because I don't spend all my categories to zero each month. So I can just throw a bunch of money in a random account periodically because it's just a lot easier to have some money sitting there for them to auto-withdraw. 

      Reply Like 2
      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
      • 1 yr ago
      • 2
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      Purple Vacuum 

      Purple Vacuum said:
      So one of the benefits of YNAB is the ability to really use one account for multiple purposes though?

       No, you can use one account for multiple purposes regardless of what budget software you use.  Or you can do that even if you have no budget.

      Bear in mind that the "one account" recommendation is meant to foster simplicity and avoid the danger of overdraft charges.  The recommendation comes directly from Jesse Mecham, the creator of YNAB.  Jesse is far more conservative than the average investor his age (early 30s, I think).  Jesse is far more conservative than I am at age 62.

      Once your budget grows above some size (exactly what size is debatable), the danger of overdraft becomes negligible and you can start thinking about earning more interest.  To put this in perspective, right now my budget contains 8.3 times as much money as I put in each month.  Obviously, my typical month will not consist of spending 8.3 times my income.  So it would be silly of me to keep it all in checking earning a mere 0.65% APY.  Some of it is in savings (1.50% APY, and others think I'm silly for not going with Ally for 1.60% APY).  Some of it is in a CD at 1.50% APY, which looked really good when I bought the CD: when it matures in December, I will put the funds into something else.  Some of my budget is in I-bonds earning a variable interest rate based on inflation; my oldest I-bonds date from 2010.  I have yet to be forced to cash an I-bond.  Some of my budget is in T Bills, which was a mistake on my part for on-budget money; but I anticipate that they will mature and I will be able to put the money into something more sensible.

      Bottom line, my budget funds need to be in something that has no danger of loss of principal (other than to inflation), and that I can access timely enough for any budgeted expense that might occur.  My checking account is accessible instantly.  I can transfer money from savings to checking in 2 minutes, assuming I have functional internet access and it's not during one of my credit union's monthly maintenance windows.  I could break the CD at the cost of an interest rate penalty, probably almost as fast as I could move savings.  It would take me a few days to get the money out of the I-bonds, but I expect I will have a few days warning if I need to spend money on something big enough to force me to redeem I-bonds.  I cannot get to the T Bills at all until they mature, which is why I say putting budget funds into them was a mistake.

      It's more of an art than a science to determine how much money you need in checking to cover cash flow.  I leave more in checking than a truly aggressive cash flow manager would, but when the balance creeps up to be more than 1.5 times my monthly budget income I start thinking about how much i can put somewhere else.

      As to why . . . my checking account pays 0.65% interest.  My savings account pays 1.50% interest.  If I can move $2000 from checking to savings and leave it there for 2 weeks, that's an incremental $0.65 income.  I don't know about you, but if someone driving by my house throws two quarters, a dime, and a nickel onto my property, I'm going to pick them up and put the extra $0.65 into my budget.  (I wish.  More commonly, they throw a beer bottle or a fast food drink cup that I need to pick up and put in the trash or recycle bin.)  And most often, the money I can move from checking to somewhere paying higher interest stays there a lot longer than 2 weeks.

      Reply Like 2
  • Nolesrule and jenmas I appreciate all of the dialogue and your guidance. Hopefully I didn’t scare you off! :) 

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  • nolesrule said:
    Every category in your budget is for spending. Some of it is current, some of it is for 6 months from now, some of it is in a year, some 5 years, some of it is for stability (Income Replacement Fund which might be tapped today or never). Only money that has no purpose goes into volatile investments.

     As a new user, this is what I'm doing. My e-fund savings account is added to YNAB and a budget item ("Income Replacement Fund" too, funny enough) and has 8-12 months worth of expenses available. Should I stop receiving enough income from my regular job, I will budget my immediate obligations and recurring expenses at least one month in advance to see how much to transfer over (this should put me in the red). Then, I'll move what I expect to use for the month into checking from savings, and I will use YNAB to move that same amount from "Available" to "Inflow: To Be Budgeted" to zero things out.

    Am I thinking of the scenario in the right way?

    I guess an alternative could be to flat out budget all 8-12 months to see how much runway you have? But then you get a job in month 3 and paychecks in month 4, and you're still budgeted to infinity, and that seems all sorts of weird.

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