Month Ahead v Income Replacement v Emergency
Hello! Been YNAB'ing about 9 months now and have hit a new challenge I am shocked to even be having - how best to structure longer term savings.
I learned this morning (via this forum) that big picture savings can be split 3 ways
- an emergency fund (for actual emergencies) to pay bigger ticket unanticipated issues, like a tree falling on your car. A decent chunk of change but not huge.
- a month ahead fund, so you can budget for the next month all at once (vs putting each paycheck a month ahead as you get it). Our pay periods are a constant dribble and a single dump and tricky to balance. Love the idea of plopping our income in a single bucket, the moving it "to be budgeted" once the bucket is full. No tracking when that dribble will finally shift what month the dump will fund.
- income replacement fund. This is the job loss fund, more or less. To my surprise I don't really need to pre-fund 6 months of my cellphone bills etc to achieve this goal. Had been thinking that what was meant. Avoids planning in detail too far ahead, is a single goal with a number, and keeps the safety of having the money in hand.
Have I got these concepts right? How have you gone about actually funding? Have heard people fund ahead further if their income is unstable, what works?
The income replacement goal is a scary number to me right now, but easier to visualize than a budget fully paid 6 months out. I should be able to start finding it once I hit my emergency fund goal.
I look at my savings account right now and and can't believe that number, then I look at that YNAB fund and realize I am no where near where I want to be.
Spring Green Lobster said:
to pay bigger ticket unanticipated issues, like a tree falling on your car.
Ideally, this is anticipated and covered. I have my auto deductible category funded. A separate home maintenance/repair (e.g., if the water heater or air conditioner goes out). A separate home-owners insurance deductible. Etc. Having these separated gives you insight into the ability to handle multiple, likely, near-simultaneous "emergencies". You may change the plan once confronted with an actual expense, but it's a Plan A.
Most people start out with a generic, single emergency fund and cross their fingers they don't get hit with multiple (or more expensive) things. Money is tight, so you hope for the best. As the financial situation improves, covering the likely bases is useful with prioritization.
For example, with a single EF, I might be tempted to fix the house air conditioner. However, when broken up into Home Repair and Medical Deductible, and faced with robbing Medical Deductible to cover part of the AC repair, I wouldn't do that. Covering Medical costs (or avoiding debt for the same) is more important than the AC.
The income replacement is just more of the same concept -- just one of various "emergencies" that won't be (eventually) because they are actually anticipated.
Spring Green Lobster said:
a month ahead fund
This provides both clarity and no small measure of convenience. The "only" thing that is necessary is that expenses occurring between your first check and the end of the month are already budgeted. That means you don't need that check in the same month's budget, so it's a simple matter to queue it up in a holding category until the end of the month (when everything has been received).
While opinions vary, I recommend that people pursue this getting ahead before an emergency fund. The reason being that an EF is useless until you need it, but facilitating the month-sized budgeting is useful every single month. IF, and I repeat IF, an unanticipated expense / emergency couldn't be handled otherwise, you could pull from the Income Next Month category. (You'd obviously lose the benefits of being ahead at that point, much like you lose out on the ability to go on vacation if you rob the Vacation fund.) However, until that happens, you might as well make life easy for yourself.
This post discusses specific workflows that I believe are optimal. One is more appropriate when working toward getting ahead, and the other is better once you have reached the point where all income can be pushed into next month's area.
I like the idea of splitting them up but in YNAB but I just have it all in one category "Emergency Fund". I use Ally Bank and they let you split it out into "buckets" so I just use that. This keeps YNAB cleaner and in fewer categories. Others might like to split them out in YNAB which is fine as it is a personal preference on how you manage your budget.