Intentionally overbudgeting a category
I'm working on transitioning to YNAB from a custom spreadsheet I've been using for several years. The philosophy is a bit different; I think I'm going to like it, but I'm still trying to wrap my head around what it's going to look like.
One of the things I'm always aiming for in a budget is how it can help smooth out my expenses over time. Some categories (rent, for instance) are identical every month, but others (electricity, clothing, food, gas, even fun money) can be highly variable depending on usage. For those, I've typically gotten the best results from intentional over-budgeting —instead of budgeting the average, I budget the average plus one standard deviation. If I spend less than that, I move the extra budget into a separate "variability" fund; if I spend more than that, I withdraw from the variability fund to cover it.
This strategy is actually one of the biggest things that got me considering YNAB. With my old spreadsheet I had to simplify the math for practical reasons —rather than adding/subtracting individual categories I handled the variability fund by looking at all bills in total. With YNAB I can actually handle each category's variability independently, which will really save me a lot of time, I think.
However, now that I've been playing with it for awhile, I'm struggling with one aspect of all this. Not all of these variable categories are created equal in terms of priority, right? Or in terms of how the spending decisions are made. I have to pay the electric bill every month whether it's high or low, and the excess budget amount in the low months will help pay for the excess spending in the high months. But what about clothing? Or fun money?
If our average Fun Money spending in the past few months was $100 with a standard deviation of $20, the strategy outlined above suggests I should budget $120, on the assumption I'll probably have $20 left over in the category at the end of the month. But here's the difference: with YNAB I'm looking at the category balance when I make my spending decisions, whereas with my old budget I only looked at it when it came time to reconcile the variability fund —I just spent the way I spend, and it tended to work out because the formula made sense. With YNAB, if I look at the balance and see that I have $120 set aside in this category, I'm almost certainly going to end up spending the whole $120. Averages go up, we end up spending more in the long run. Right?
So if I want to reduce spending, I should change tactics on the truly discretionary stuff —budget less than average, and then move money in from other areas once I discover an unplanned need to spend more? Is that the right way to do this?
But can I still overbudget the less discretionary stuff, where I'm not actually making any day-to-day spending decisions (like the electric bill)?
It's kind of what I do, overbudget on the obligations and be a bit more ambitious/aspirational with the categories I have more direct day-to-day control over.
I tried to guess at my annual average for variable utility bills, and they've been accumulating over the summer. For more discretionary categories I budget on the lower side. I have a small "Just for fun / Totally discretionary / No questions asked" category that kind of acts as an overflow for discretionary categories that end up being not sufficiently funded. Over the months though. I've made that category amount smaller and smaller so I'm reluctant to spend it on something I don't truly want or need or care that much about. It's been good to make me more mindful about my spending, although that's also been progressive: right now it's at €20/month but when I started it was at 75, and I would have gone crazy and given up on the budget if I'd tried anything much smaller. Or you could use the "Stuff I forgot to budget for" category for that, though I found for me it kind of became "free for all" money and encouraged me to overspend so I lowered that one too in the end.
Having clear, major goals that I can move money leftover from discretionary categories to at the end of the month has also helped with keeping things under control!
Good luck figuring out the way it works best for you 🙂
I agree that all categories should not be treated the same. I have 60+ categories. About 50 get budgeted the exact same amount every month. Remaining funds after that are then divvied up across all 60+ based on my priorities that month. Groceries, Restaurants, Admin, Electric, Gas, and Car Fuel are zeroed out at the end of the month and the freed up funds go to a savings category (right now the top 2 are Kitchen Remodel and Sister's Wedding). Certain categories are allowed to accumulate funds indefinitely and if at some point I decide the available balance in one of those categories is too much, I reallocate to some other category. Other categories are allowed to accumulate until they reach a specified cap. However, the way I handle that is that if I budget $50 to the category every month and the cap is $350 and at the end of September the balance is $325, rather than budget $25 in October, I reduce the available balance at the end of September by $25 so that my budgeted column always looks the same on the 1st of the month.
However, I'm not particularly trying to reduce spending. I like to spend less than I budget in Restaurants and Groceries, but at the same time, I budget an amount that I am perfectly comfortable spending if it comes down to it. My discretionary budget hasn't really had a "raise" in years because each time I get a raise I usually throw that to increased 401(k) or taxable investing.
Rather than limit to one standard deviation, I find for the highly variable and seasonal categories to budget a 12 month average with a cap on the category equivalent to 1 average month + the sum of above amounts above the 12 month average spent in the last 12 months.
I use this for gasoline, electricity, natural gas and water bills.
For other categories that have less variability, I budget the same every month and just pull out whatever is left at the end of the month. This works because the spending is natural and we're not targeting zero as a final balance.
Forest Green Viper said:
So for example, if the 12-month average is $100, and over the course of those 12 months there have been $450 worth of payments that exceeded $100, the budget cap would be $137.50, right?
If you average $100 per month and have 4 months where you have $150, $200, $125 and $110, you're overage amount would be $50 + $100 + $25 + $10 = $185.
So at the end of the month, if you still have more than $185, you can remove the excess, and if you have less, keep it. Or alternatively, you can do the calculation at the beginning of the month by adding $100 (monthly average) to the overage amount.
But you also have to recognize when you're having a low month vs. a high month and may need to prefund in order to cover high months before the formula can kick in.