What are your mindsets for Emergency Fund and (big)Savings Categories?

Hello YNABers.

We've been pondering over this for a while now about Emergency Funds. 

You hear this a lot, "You should save 3 to 6 months worth of expenses as Emergency Fund." I always thought that seemed a bit abstract and not tactical enough to grasp the concept of.

If this means, you look at the report on YNAB and see the monthly average expense, multiply that by 3 to 6 and that's your Emergency Fund amount you should aim for. Okay, simple enough. But I wonder what "emergency" means in this context. Is this "Emergency Fund" separate from all the other big savings goals that you can't predict how much and when but you are saving for since you know they will happen some day?

We have categories like "Car Maintenance", "Cats", "Medical", "Savings for Move", "Implants" ... big ticket items.  I think Jesse had a podcast on this matter while back. Depending on what you think of as "emergencies", most things can be covered by appropriate category savings without tapping into Emergency Fund.  

For instance, when I got in a car accident and had to pay for the deductible and associated costs, we had enough in "Car Maintenance" category that we didn't have to dig into Emergency Fund.  Same, for say, a root canal or cat's surgery and so forth. So, is Emergency Fund a simply for time when you lose your job and income stops? 

There is that rule, Roll with Punches. So if there is equivalent amount of 3 to 6 months expenses amount aging away in big ticket item & unforeseeable events categories, can that count as "Emergency Fund"? Since you could probably roll the savings amount from "Vacation" or "Furniture"  into "Groceries" if you lost your job temporarily. Or do you save the 3 to 6 month of your expenses amount first for Emergency Fund, only then start funding those big ticket item savings categories on top of Emergency Fund?

I'd like to know what your take on this and how you go about it.

Thanks!

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    • Patzer
    • Retired at age 60. Thank you, YNAB!
    • Patzer
    • 2 yrs ago
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    I don't like the term "Emergency Fund" as a budget category.  It's not as ill-defined as "Savings," but there's still an awful lot of wiggle room.   The questions that spring to mind with an Emergency Fund category are, what is an emergency?  Under what circumstances would this category be used?

    That having been said, I had an Emergency Fund category from 2009 to 2016.  Over time, it got re-defined in my head as "Income Replacement."  That meant it was there to cover job loss or economic catastrophe of similar magnitude.  It just kind of sat there and slowly grew, till in 2016 I had over year's worth of budget in that category.  Then I retired.  Part of the Emergency Fund category was used to replace income in the transition between work and retirement (lots of moving parts in that transition).  I concluded I really didn't need an Income Replacement category after my ongoing retirement income was set up, and sent the bulk of the former Emergency Fund off-budget to investments that will produce income for me.

    I still have an "Unexpected Expenses" category.  It is not sized as months of expense.  Its mission is to bail me out when unforeseen things happen without having to bust other budget categories.  I had originally planned it to be $1000; in 2008, when my daughter drove my car with $1000 deductible collision into the door frame of my garage with $1000 deductible homeowner's insurance all of a sudden $2000 seemed like a better number for Unexpected Expenses.  Right now, I'm slowly growing it to be the rough equivalent of one month of budget.

    It's true that in the event of a major emergency I could rob other categories (Car Replacement, Home Improvements, Vacation, etc.).   But what if I had lost my job right after replacing my car, and funding a major home improvement?  Having an Income Replacement type of emergency fund ensured that I would be covered no matter where I was in the expense cycle of all the other long term categories.  It's true that in the event of job loss, I would have looked at cutting my overall budget as much as possible; the Income Replacement fund was there to make this an exercise in stretching how long I could last before finding a new source of income, rather than being forced to give up all conveniences.

    Whether you need 3 months, 6 months, 12 months, or whatever depends on your personal situation.  If your job is very secure, or your skills are in high demand, 3 months is likely adequate.  I perceived my job as not very secure and the chance of getting a replacement job of equal pay as being small, so I wanted a large Income Replacement fund.  It turned out that I didn't ever lose my job, but the money was there to protect me for as long as that was a possibility.

    Like 5
  • I agree with Patzer in that it's Income Replacement.

    In terms of how much 1 month is, for us it's defined by the expense categories that need to be funded, whether we are spending it monthly or not. We still need to fund car maintenance. We still need to fund house maintenance. We still need to pay property taxes quarterly. Those don't care if you lost your job or not. But there are regular expenses you can cut back on or cut off  (the wants), and savings categories where the funding can be put on hold.

    As for how many months, there are many factors. How stable is your job? Are you married with a single or dual income? How long would you anticipate it taking to find a new job of similar pay in a bad economy?

    Furthermore, you need to keep an eye on that amount over time. Even when you have the Income Replacement fully funded, there's going to be inflation of expenses, and you need to account for that.

    We have a budget where we fund every category exactly the same amount every month, with room to spare from our income (the extra going to accelerate savings wants or being invested). So that means we've got a solid grasp of what expenses we can't do without. So our Income Replacement is funded to 6 months of the amount we've determined we need in a worst case scenario of both of us losing our jobs. Since it's fully funded,  we are still adding a bit to it. Every year since we hit the target, I take the amount, calculate 5% and continue to fund it monthly at 1/12 of the 5%. This is our inflation protection.  And when we add a new expense that will need to be funded, such as braces for the kids or adding a kid to the cellphone plan, I make sure we're still on target.

    Like 3
  • As far as I am concerned, car repairs, AC breakdown in the middle of heat wave, and similar are things that will inevitably happen so I plan for them so that they aren't an actual emergency when they happen. So I don't have an emergency fund.

    I have a category that covers the year's out of pocket maximum for medical expenses. I keep $2K in the car repair category. I keep $2K in the home maintenance category (I have a condo so my maintenance needs are smaller, I replaced my hot water heater in 2013, HVAC in 2018, any kitchen appliance replacement is in the Kitchen Reno category that is almost funded anyway; if I had a house I would be constantly building up that category) and on top of that I have an Income Replacement fund that should cover me for 6-8 months (well, right now it would cover me for 3-6 months since I raided it last year when I impulse bought a rental property).

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    • MsTJ
    • YNAB has given me back my future
    • Believer_in_YNAb
    • 2 yrs ago
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    Great question Powder Blue Yeti .  You have gotten responses from some of the better budgeters here so maybe they answered your question.  I wanted to add my definition of my "emergency fund" for more food for thought.  

    I am no longer employed so my emergency fund is not an income replacement fund. It seems some people in my situation don't keep an emergency fund, and I do.  I fund all the true expenses I have identified to date, and something always seems to come up.  Either I don't have enough in the category yet or something I hadn't thought about comes up.  The way I look at it, it doesn't hurt to have "too much" put aside for things that could happen.  I live in California and we could have that massive earthquake that everyone keeps talking about any day now.  I could live in other areas of the country that have major, home and city destroying natural disasters regularly, fires, floods, storms, the list goes on and on.  

    That is why I keep funding my emergency fund.  I don't have enough in it yet, and I keep chipping away at it, every month.  In my opinion, and for me, the emergency fund is vital to my peace of mind. 

    Maybe, one day, I will have enough in all my categories that I won't maintain my Emergency fund any longer.  That day is a long way in the future for me. 

    Like 4
    • TryingToGetAhead I'm right here with you! I broke down my Peace of Mind categories into "Income Replacement" and "Emergency Fund." I keep an emergency fund because I'm slowly building up my True Expenses categories but it's taking time to have them all filled in, so Emergency Fund will serve as an overflow in case I get an expense bigger than any of these categories can chew at the moment. But like you, maybe one day once there is "enough" in these  perhaps the Emergency Fund will have outlived its usefulness. Perhaps.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      TryingToGetAhead When you are still in the process of getting started, it doesn't hurt to have money for "Things I forgot about when setting up my budget." Nothing wrong with that. It could take a couple of years before you get a good handle on it. Some expenses are less frequent than yearly.

      I still have what I call a "holding" category, which I cap at 2.5% of my total budget which is used for one-time smallish expenses or to help pad the budget for future expense increases.

      Like 1
  • This is a very interesting discussion. For  Patzer nolesrule ,  jenmas  ......and anyone else that comes behind this comment with Income Replacement categories ... I have a question.

    I currently don't have anything like that -- I do have an "Emergency Fund" but I've noticed a level of maturation in my budget to which is no longer necessary and I will probably soon break that up into more appropriate things -- but in the place of an actual "Income Replacement" category I just have all of my budget categories funded. So I have the next 3 months of budget fully funded instead of having a IR category funded with 3 months of the budget.

    Assuming you all do something similar how do you handle funding the IR category versus funding a future budget category?

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    • This Is JKB I only fund one month in advance, for the reasons nolesrule mentioned. Then I put whatever amount of money every month until the category is fully funded, since there is usually a cap - say 6 months of expenses. My spending pattern will likely change dramatically if I lose my income so for me, it's easier to work with a separate category in that case as well.

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    • Coral J Hammerhead Gotcha.

      I was thinking that's what I'd probably end up doing as well after reading  nolesrule 's response, leaving September how it is but "defunding" October and November and moving that money into a new account -- which would be named "Income Replacement" from what I'm seeing in this thread, haha.

      Thanks for the response!

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      This Is JKB No need to open a new account. You don't really need more than one checking account. YNAB gives purpose to your money, not the accounts. Keep in checking what you need for the next month, with new income replenishing your spending. Keep in savings what you don't need in the checking account. Living below your means, you'll find with this method that most of the time the checking account balance will grow large and you'll end up sweeping funds into your savings account.

      The only reason I have multiple non-checking accounts is because I keep savings at 2 different banks, have a CD-ladder and Savings Bonds for the latter half of my Income Replacement.

      Like 1
    • nolesrule  I misspoke when I said "account", I actually meant "category".

      I don't plan to open anymore accounts until I start to approach your level (haha); CDs, money markets, etc.....not quite there yet. 😀

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      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
      • 2 yrs ago
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      This Is JKB 

      This Is JKB said:

      how do you handle funding the IR category versus funding a future budget category?

       Funding budget categories into the future would detract from my focus.  Prior to web-YNAB, we were taught to live on last month's income, i.e. money received in July was used to budget August.  The tagline at the time was, "Budget in 30 minutes a month!" 

      When that tagline came out, many people on the forum reacted kind of, yeah, right.  It takes more than 30 minutes.  But guess what?  Once stability was achieved, I budgeted in 30 minutes a month (not counting time recording and tracking expenditures, just the budget decisions) from 2012 through 2017.   I worked really hard to figure out workarounds to restore 95% of the functionality from YNAB 4 that was deliberately stripped out of web-YNAB.  And now I'm budgeting in under 30 minutes a month, in web-YNAB.

      Part of the efficiency is, I don't budget forward more than one month.  I will budget September no earlier than August 31 after I'm sure I've made all my spending transactions for August.  I don't know how many people will agree with my reasons, but my reasons include:

      - I see no value in using August income to budget groceries for October, November, and December.  I will have September, October, and November income sufficient to let me eat in October, November, and December, respectively.  And if something happens to disrupt the income stream, I should be changing the budget.

      - I can handle budgeting big ticket, seldom spent categories one month at a time.  The sample categories in generic new web-YNAB budget don't include stuff like Car Replacement or Home Improvements; these are what I think of as True Expenses.  The list of True Expenses supplied with the generic budget looks like Immediate Obligations to me; they are just Immediate Obligations that don't happen every month.  They aren't the big ticket True Expenses that make you borrow if you didn't prepare for them.

      - When I'm successful, I will sometimes be in a position where all my monthly spending categories are funded, and all my big ticket categories (both True Expense and Wish Farm types) are on track for where they need to be this month, and I have money left over.  Budgeting that leftover money to a future month would be easy, but the better thing for me to do is throw it out of the budget at income producing investments.  When working, this took the form of sending money to a brokerage account.  In retirement, this takes the form of reducing how much I draw from investments next month.

      - Budgeting multiple months in the future detracts from thinking about what I might need that I have not yet created a budget category for.  My car won't last forever, so I have a Car Replacement category.  This is not on the generic list supplied by YNAB, but adding to things like this is certainly a higher priority for this month's budget money than groceries for the month after next is.

      All this, and right now I don't have an Income Replacement category.  I had it while working, to protect myself from a possible job loss.  In retirement, my income is not subject to corporate whims; it is what I get from Social Security and a small pension, plus what I earn on investments.  Except, my budget income does not include all my investment earnings.  It only includes what I draw from investments for consumption, which is a number I control subject to the natural consequences of making the number too big.

      Eventually, someone who is working will build the Income Replacement category up to a target level and that will stop being the best use of incremental budget dollars.  At that point, a decision must be made as to what is the next best use of the incremental budget dollar.  In my case, that next best use was preparing for retirement.  While I heartily recommend this goal, I understand that having an early or a comfortable retirement may not be as high a priority for someone else as it was for me.  However, everyone should think about what IS their highest priority goal if all the mandatory budget categories are fully funded or on track to be fully funded when needed.  Then throw any excess dollars at that highest priority goal.

      I have not seen YNAB articulate what to do when you have been successfully budgeting and have excess money.  That's a shame, because many people who use YNAB will end up in a position of needing to decide what to do with the excess money when they've won the budgeting game.  IMO, budgeting multiple months into the future is unlikely to be the top priority for very many people who think about this seriously.

      Like 7
    • Patzer thanks for such a thorough response!

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      • Powder Blue Yeti
      • Old Farm Cats, Baking, Japanese
      • Powder_Blue_Yeti.1
      • 2 yrs ago
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      Patzer 

      This is simply awesome! I nodded yes to all of the reasons you stated. Especially this:

      Patzer said:
      At that point, a decision must be made as to what is the next best use of the incremental budget dollar.  In my case, that next best use was preparing for retirement.  While I heartily recommend this goal, I understand that having an early or a comfortable retirement may not be as high a priority for someone else as it was for me. 

      In regard to " At that point",   I've been wondering about opportunity costs vs. risk tolerance/comfort level. A question came up, "At what point when do we start investing in taxable brokerage account?" After maxing out on tax-deferred accounts and Income Replacement but in the amount one might think not enough and the other might say enough. How much of that is negotiable between Income Replacement and opportunity costs?  I am curious to what your guys' takes on it.

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      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
      • 2 yrs ago
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      Powder Blue Yeti 

      Powder Blue Yeti said:
      A question came up, "At what point when do we start investing in taxable brokerage account?" After maxing out on tax-deferred accounts and Income Replacement but in the amount one might think not enough and the other might say enough. How much of that is negotiable between Income Replacement and opportunity costs? I am curious to what your guys' takes on it.

      This gets into subjects that are technically not part of budgeting.  Looking at finances through the coordinate system of YNAB makes some things easy to see, and obscures other things.  Looking at finances through the coordinate system of investing obscures much of what YNAB makes clear, but clarifies other things.  And tax planning interacts with both budgeting and investing.  So if you're only interested in budgeting, you can skip to the next post right now.

      From a tax planning standpoint, I want investments in three types of tax vehicles:  Tax Deferred (e.g., 401(k) or traditional IRA); tax exempt (Roth IRA or Roth 401(k)); and taxable (plain vanilla brokerage account).  I can run a tax analysis of the consequences of investing one way or another; but I don't know what future tax law will be like, and it's nice to have options available.  In particular, in retirement I see the Roth IRA as a source of major funds for a big ticket expense without bumping myself into a higher tax bracket. 

      From an investing standpoint, when I was not particularly near retirement I wanted funds in a taxable brokerage account for possible big ticket expenses before I reached retirement age.  The one that concerned me the most was my daughter's college, and I did not accumulate enough to fund a traditional 4-year degree.  Fortunately for me, she chose to go to a very affordable community college, and the taxable brokerage account could be re-purposed for my retirement because I was able to pay for the community college with budgeted funds.

      From a budgeting standpoint, when I was working I budgeted for contributions to the Roth IRA and the taxable brokerage account, then "spent" the budgeted money by transferring it to the appropriate investment accounts.  For the Roth, I'd build the category up to the maximum I was allowed to contribute, then transfer that amount to the Roth in early January when the tax year started.  For the brokerage account, I budgeted a nominal $100 per month so I wouldn't forget about it, and transferred that much every month.  In addition, the brokerage account got leftover budget money when I had no more urgent use for the funds.  This worked well in the budget, because I didn't have to live with contribution limits to the brokerage account and didn't have to change planned contributions if I had a windfall to throw at it.  I would throw big one-time inflows at investing categories, typically using my bonus to fund the following year's Roth IRA contribution and any tax refund to add to the brokerage account.  Throwing irregular large income at investments got me in the habit of living on my base income, which was good preparation for retirement.  I no longer have bonuses, and I can control tax withholding and estimated payments in such detail that I should no longer have large tax refunds.

      I would note that I only maxed out my 401(k) in one year, 1996.  In 2016 I was on target to max it out, then I decided to retire.  I didn't get my increased 401(k) withholding submitted in time for the June 30 paycheck, so I fell a little short of the maximum annual contribution with my final check being August 31 instead of December 31.  I don't regret funding the taxable account while not maxing out the 401(k); that is what I was able to do with my budget, and it's sure nice to have a taxable account that I can take money from with no tax consequences to the withdrawal.  Tax consequences of investment activity, yes; but I deal with those.

      All this happened in the context of, I had a big enough Income Replacement fund.  I wanted 12 months of par budget, and it stayed close enough to that for my comfort level.  I did not worry about 12 months of Income Replacement earning less than inflation and having an opportunity cost; the job of that money was to protect me from unanticipated loss of employment.

      Again from an investing standpoint, having a budget that is flush with cash and fully funds things like Car Replacement and Home Improvements allows me to invest more aggressively.  Standard investment advice for retirees calls for holding 3 to 5 years worth of expenses in cash.  I hold one year worth of expenses as cash reserved for the budget in my various investment accounts, and I allow myself to invest any cash in excess of that.  The budget has about another year worth of investment draw spread across all the categories, so call it 2 years worth of expenses in cash.  But the cash in the investments is continually refilled by dividends and interest, and the fully funded budget means I'm not worried about having to sell investments when the market is down for living expenses or to replace a car or whatever.

      All this may seem rather beside the point for people who are still working; but it is worth a worker's time to think a bit about how things should work in retirement.  Then the worker can take action (including appropriate budgeting) to work towards getting to a point where retirement is possible and it's not necessary to eat cat food.

      Like 1
      • Powder Blue Yeti
      • Old Farm Cats, Baking, Japanese
      • Powder_Blue_Yeti.1
      • 2 yrs ago
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      Patzer This is such great insight from a veteran budgeter/investor. You really sound like a personal finance master! I appreciate all your input here, they are all relative to what we've been thinking about.

      We are not near retirement but at a mid-point where we needed to start thinking about the future if we actually wanted to live decent life at older age(like, not eat our cats' food). We spent our young starting years in NYC with no plan whatsoever (or big paychecks) so we had to shift gear to have our finance and budget in shape. We came to this game pretty late so we are trying to catch up fast. Perhaps, I'm rushing it too much, thus such mention of opportunity cost. But I can see from your comments that patience is needed here to accumulate safely over time, and we shouldn't jump into stock market too much too quickly.

      I agree that YNAB lets us see some aspects of investing clear and obscured on others. After you mentioned about the Income Replacement though, I could define what Emergency Fund meant for us and settle it into a more comprehensible spot with new name within budget. If I may ask, where did you park your Income Replacement? No need to answer if you feel it's not appropriate to.   

      Thank you!

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      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
      • 2 yrs ago
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      Powder Blue Yeti The YNAB budget does not care where the money in the categories resides, and Income Replacement was a budget category.  For a while, I kept a savings account or collection of savings vehicles equal to the Income Replacement category; that turned out to be more effort than it was worth, so I just stopped worrying about it.  I keep enough liquidity in checking (0.65%) and savings (1.75%) that I don't worry about the common stuff, and I park some money in I-bonds (variable rates, currently selling for 2.52%, not subject to state income taxes, interest taxable when the bond is cashed) and some in T-Bills (short term rates determined at auction, not subject to state income taxes, interest taxed at maturity.)  It's a balancing act between yield, liquidity, and tax consequences.  I also have a CD maturing in December that won't be reinvested.  My current thinking is to use the proceeds for a one-year ladder of 13 x 52-week T Bills.

      For a working person, keeping roughly the equivalent of an income replacement fund in I-bonds makes sense.  Lose your income, and paying taxes on a lump of interest is the least of your worries.  I'm not sure how much I want in I-bonds for my current situation; big withdrawals should be discretionary, and do I really want to pay more income tax the year I replace my car?

      It's a work in progress, and will probably stay that way for the rest of my life.

      Like 1
  • This Is JKB said:
    but in the place of an actual "Income Replacement" category I just have all of my budget categories funded.

     Those of us who have been around YNAB awhile don't recommend budgeting multiple months into the future as your Emergency Fund/Income Replacement Fund. The primary reason for that is the work required when something changes in your budget whether due to external influence or just a choice to make some budget changes.

    What happens when when of your monthly fixed expenses goes up  a dollar or so? You need to add money to that category to cover the new cost, and also remove it from another category. If you budget multiple months ahead, you have to make this same change in each of those months.

    Add a new category because you've added a new expense? Same thing. You have to figure out where the money is coming from so you can add it to the category, and then make the same change in future months.

    In your case, that's 3 months of changes to a minum of 2 categories every time you want to make a change.

    If you just hold it all in a category for Income Replacement, then you don't need to do that work.

    My next paragraph is long, but I think important for any budgeter to understand in your situation...

    Living on last month's income, or being buffered as it is sometimes called (though I hate that word), has a separate and distinct use from that of the Emergency Fund/Income Replacement. The purpose is so that you can aggregate all your income events from the previous month, and it allows you to budget out the month in a single go . It allows you to end not just paycheck to paycheck living and break the cycle of typing your expenses to paychecks, but paycheck to paycheck budgeting. When you eliminate paycheck to paycheck budgeting, you break the mindset of paycheck to paycheck living and you can see your budget in a whole new light. It makes it easier to reduce debt, or increase retirement contributions, or add a new savings goal, or even send money out of the budget to a brokerage account because you realize you just don't need it.

    Unfortunately YNAB doesn't teach about this advantage nor do they provide the functionality that was in YNAB4 to support this.

    Like 7
  • nolesrule said:
    Those of us who have been around YNAB awhile don't recommend budgeting multiple months into the future as your Emergency Fund/Income Replacement Fund. The primary reason for that is the work required when something changes in your budget whether due to external influence or just a choice to make some budget changes.

     I'm not surprised to hear you say that. I've been using YNAB since December last year and i just got to the point where I was multiple months ahead of my checks after paying off a lot of what my wife and I call "old stupid debt" (credit cards, etc....you know the story, haha), And while it feels GREAT seeing the next several months taken care of in YNAB I absolutely understand that point because I've had those thoughts (what happens if something significant changes?) but haven't had to deal with it (yet).

    Right now my Emergency Fund (EF) and my "future obligations" are completely separate -- which is what I believe you were pointing out in your final paragraph -- EF is its own category just like my mortgage. If I were to lose my job tomorrow I could safely pay all my bills for the next 3 months without touching the EF.

    When I first started using YNAB I was loosely following the advice of Dave Ramsey and ended up doing this:
    1) got an EF setup
    2) got 1-month ahead of our immediate obligations
    3) got a majority of the "true expense" funded (auto insurance,  HOA dues, etc.)
    4) threw all of our "weight" at cleaning up the stupid debt
    5) finished funding the remainder of the true expenses
    6) got 3-months ahead of immediate obligations

    And that's where I am now, getting to #6 was what I had my sights set on in the beginning so, to be honest, I'm not entirely sure what to do next other than continuing to fund future obligations (which I know there is a better way to go). That's part of the reason I've gotten so invested in these forums recently, to try to understand what I should do next, haha.

    Thanks for that final, lengthy, paragraph...it was definitely helpful.

    Like 3
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      This Is JKB My first recommendation would be to move the future budgeted months into an Income Replacement category. And then determine how many months you want that funded. As I said in my first post in this thread, the monthly target amount should be anything that needs to be funded monthly regardless of if it is spent monthly, not just immediate obligations.

      My second recommendation would be to divide up the Emergency Fund category into categories covering the known emergency expense types, and maybe leave a little bit for the unknowns (but I would not call it "Emergency Fund".

      There are rules of thumbs for funding the known unknowns... those are expenses you know will happen, you just don't know when.

      Cars.... a  car originally bought newish is going to run you about $50/month in maintenance and repairs over the life of the ownership of the vehicle. But the spending is lumpy. regular maintenance doesn't cost a lot but only happens a couple times a year. But as the car gets older, there are some larger maintenance costs, and you'll be likely to have some repairs. So fund it $50/month. For an older car, you may want to seed the category. Some people cap it, but we've never gotten there, as we have a 3 year old car and a

      Home... if you own, the rule of thumb is 1% to 2% of the value of your home per year. If you live in a condo or rent, the numbers will be much lower depending on your contracted responsibilities. This covers the little things, calls to the plumber, HVAC, gutter repair, etc.  but also end of life of on roof, appliances, HVAC, deck maintenance/repair, etc, but this is not Home Improvement projects. So take the value of your home, divide by 100 to get to 1% (or 50 for 2%), then divide by 12, for a monthly funding goal. Then fund it that much each month, every month. If you've been in the home more than a couple of years, seed the category with at least 1 years worth of funds.

      Medical. Your goal here is to have enough to cover your annual insurance maximum medical out of pocket, or maybe even 2x max OOP. If you have an HSA, that can be your medical source of funds instead. But don't forget about Vision and Dental costs, because those will not count toward your maximum OOP for medical.

      Unknown unknowns. As I said, I have a holding category of 2.5% of the funds in my budget.

      Like 4
    • nolesrule  I didn't realize how much of an infant I still was at this stuff until I read this post (and here I was thinking I had grown up a bit, LoL).

      I have actually already started to adjust things in a manner that will address what you mentioned about Cars and Medical, though my immediate goal for medical is just getting each of our individual deductibles funded as we are a family of 4 (didn't even consider OOP maxes, that can come later).

      Your breakdown of the Home stuff though, wow, talk about mind-blowm....my thinking had not even reached that level, haha. I will start looking more into that ASAP as we have lived in our home for much longer than a couple of years.

      Thanks for all your input!

      Like 2
    • nolesrule said:
      Unknown unknowns. As I said, I have a holding category of 2.5% of the funds in my budget.

      just so I'm clear, this is 2.5% of your income or 2.5% of what you're budgeting each month? 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      This Is JKB It's a category with an available balance capped at 2.5% of all of the money in our budget. Like I said, I do not hesitate to use it from time to time on one offs. But our budget is rather large with the fully funded Income Replacement, we're almost done saving up money for my wife's next car, we've got home improvement projects we're saving for, which makes 2.5% not a small number.

      It is actually funded with a portion of our leftover money at the end of the month after all categories are funded, and extra leftover funds are swept into the unused money total. My wife and I agreed on how to divide this leftover money up each month, based on percentages. The money goes toward the following: Home Improvement, Charitable donations, Mortgage principle paydown, investments for the kids future, our taxable brokerage, and the holding category. Money not needed for the holding category because it would exceed the calculated cap gets put in our brokerage account.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      I should add that if you are working and receiving your nominal income regularly and  don't have leftover funds from income at the end of the month, you aren't living below your means, and need to work to get there. Most people aren't there because of debt that got them into trouble. But for some it's lifestyle creep that could be cut back if you make the effort.

      When we moved across the country, we shut off the cable in our old location and just never bothered to turn it back on. I found a much less expensive method to get my FSU football fix, which was the only reason I really ever watched cable in the first place. That one change saved us over $1000 a year.

      Like 3
      • Kate
      • Joyful Technical Writer 🌴
      • sweet_sunshine
      • 2 yrs ago
      • 2
      • Reported - view

      This Is JKB That is so impressive. I'm going to use this as a blue print for myself for my financial journey.

      Like 2
    • nolesrule said:
      I should add that if you are working and receiving your nominal income regularly and  don't have leftover funds from income at the end of the month, you aren't living below your means, and need to work to get there.

       Absolutely!

      This was the very first thing I dug into when we first started using YNAB and realized just how much frivolous spending we were doing. Our actual bank account balances are at all-time highs now ,. It's still mind-blowing to me thinking about the growth of those accounts this year considering how much debt we have paid off as well.

      Kate said:
      This Is JKB That is so impressive. I'm going to use this as a blue print for myself for my financial journey.

        It seemed to work wonders for us!

      Like 1
    • HappyDance
    • YNABing consistently since 2014
    • HappyDance
    • 2 yrs ago
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    nolesrule said:
    My second recommendation would be to divide up the Emergency Fund category into categories covering the known emergency expense types, and maybe leave a little bit for the unknowns (but I would not call it "Emergency Fund".

     ^this is the path I followed in my own budget.  When I started using YNAB, my emergency fund was a single category, and it held just enough to deal with a single event. It did not hold enough to deal with simultaneous unrelated events.  If my car broke down, and I bit down and broke a molar, and I needed to travel for a family emergency all in the same time period, I didn't have enough in cash to deal with all of it. 

    Once I was able to permanently assign funds to building my emergency fund, I did find it helpful to break it out to more descriptive subcategories. I call the master category Life Happens, and I group a handful of subcategories under it.  I do find it valuable to be able to see that funds are in place for a series of different type events, and that there is sufficient liquidity in them all so that I could weather simultaneous storms. 

    Like 5
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      HappyDance Travel can be another emergency. I didn't list it as I never think about it. We have a Travel/Vacations general category that we keep pretty well funded. We've determined we didn't need a separate category, because we've always got future vacation money that could be consumed in case of a travel emergency.

      Like 1
      • HappyDance
      • YNABing consistently since 2014
      • HappyDance
      • 2 yrs ago
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      nolesrule 

      I think we can all agree that emergency-type categories tend to reflect each budgeter's personal situations, life experiences to date, and their worst nightmares. Having a few bucks set aside specifically for travel for circle-of-life events has been a sad necessity in my life twice in the last six years, and I didn't have a travel/vacation category balance to raid because vacations was last on my list of priorities.

      Now that all my categories are well-funded, I plan to start budgeting monthly to a long-neglected pleasure travel category in 2019.   I may find that when there are funds available to travel I'm not such a homebody afterall.  If/when I do travel, I know I will want a reserve in cash available to be able to alter my return plans in the event of a disaster.

      Cash reserves open up the opportunities  of choice in all situations.

      Like 5
  • Thank you so much everyone for the insightful replies! I am glad this turned into such a fruitful conversation on the topic that is not covered much by the YNAB system as some of you mentioned. I believed that there were a lot of you out there who had been using YNAB and got to a point where, "Now, what do I do with the extra?" It would be an awesome area for YNAB to tap into and have some features to integrate into the overall budget concept since YNAB does get you there successfully!

    We kept going back and forth on concepts for different savings buckets and couldn't come up with one clear aim. This conversation opened up a whole new arena of how to categorize them and have clearer goals set. Just the term "Income Replacement" redefined and sifted my mindset. In the end, as you guys said, it depends on personal situations and comfort levels. But there were a lot of actionable tips you guys gave that we can consider and map out our finance going forward.  Thank you!

    Like 3
  • Hello eminent YNABers,

    I'm a little late to this discussion, but was glad to find it because I was going to post essentially the same question and am wondering if any of y'all are still around to continue it just a little bit further.

    I was looking at my budget flush with cash and then at my debt repayment goals and wondering if I was "saving too much" cash / earning next to 0% interest - similarly concerned as the OP was about opportunity costs.

    I have a 1-month "income replacement" EF (which I also considered to be for emergency legal defense were to need it, god forbid), plus an auto maintenance category, plus a home maintenance category, plus a home improvement category, not to mention I'm one month ahead on every category including discretionary spending categories, so on the last day of the month, I have almost three months of critical bills and expenses covered. On top of this, I have a vacation category, I save for and pay my insurance bills annually, etcetera.

    I find myself thinking, as I really want to pay off my school loan, "what are the chances that I'm going to lose my job at the same time that my furnace goes to go out and my car engine needs to be replaced and I just paid my annual insurance, all while I'm on a luxury vacation while having a new tile floor put it? Get what I'm saying? Maybe it would make more sense to pool this money, but not save for the full cost of an engine replacement plus a furnace replacement, plus x-months income replacement, etcetera, because of the extreme unlikelihood of needing all the money at one time?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 yr ago
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      Slate Gray Hammerhead Your budget is a plan for all the cash you have on hand. It's really not that extremely unlikely to have a confluence of independent emergency events. For the very reason that they are all independent. You should be funding your categories in a way that meets your needs on a timeline you set. If you want to hold less cash and pay down the student loans faster, then cut back on the wants, like the vacation or the tile floor or both.

      I don't save for things like the furnace or the car engine specifically. Rather I look at the average long-term monthly needs for my house and my car, and that's how much I save for those. As a rule of thumb a house will need 1-2% of its value in maintenance and repairs per year Some years it might mean a gallon or two to stain the deck, other years it might be a new roof or furnace or water heater or freezer.

      Historically, my cars cost about $50/month each for maintenance and repairs. But those are averages. Some months/years cost nothing beyond the oil change, some months cost hundreds or thousands.

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    • nolesrule Maybe why I'm unsure about this is my approach. I've been using YNAB for just about 7 months. I started right after I paid off a huge student loan (one down, one to go) in a lump sum and I needed to track my finances carefully. I created an "Incidental Expense" Category Group with a Home Maintenance, Auto Maintenance and Emergency Fund (now Income Replacement) category. I set these up initially with monthly savings goals, but changed them to target balance goals because I don't need to carry cash beyond a certain level since I'm highly unlikely to spend more than $1000 on auto repairs or $4000 on home repairs at any one time or in a time window less than I could re-seed. 

      I seeded these categories over the past few months and am there for auto and halfway there for home. Income replacement also has one month of bills/expenses in it, which is at my goal (low risk for job loss, high likelihood of finding another job quickly and, again, I have discretionary savings I could pull from in a 911).

      Do you have reasoning that drives you to favor a monthly contributions despite overall category balances? I don't have the data over time that allows me to reliably predict a monthly average for these categories beyond your rules of thumb which make me nervous being in a nearly 70 year old house.

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  • Also I wanted to ask - do you guys save for emergency legal expenses as a separate category? This would further exacerbate my claim above about saving too much cash. If I have 3 months IR plus, say, $5-10G for a lawyer if, say, my kid were to get into trouble or something, which could just begin to pay for it, this is just so much cash sitting around.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 yr ago
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      Slate Gray Hammerhead No, I don't. But I don't expect my kids to get into legal trouble due to their nature. If i had a troublemaker, then perhaps I might. And if they do, I'll just rearrange my budget.

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    • nolesrule Thank you for the response. The kids-in-trouble thing was just an example (my kid is only 1 so I have awhile). Are there other situations where unforseeable legal expense should be budgeted for? Maybe not, now that I have an umbrella policy.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 yr ago
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      Slate Gray Hammerhead You can't really plan for unknown unknowns. You can only do your best.  For those you need to roll with the punches. It's the things you can foresee that you should not fail to plan for.

      Like 1
  • Slate Gray Hammerhead said:
    Do you have reasoning that drives you to favor a monthly contributions despite overall category balances?

     Well, for cars I have 20 years worth of data that tells me on average we spend $50/month per car for maintenance and repairs. Maintenance and repairs. So that covers the oil changes, the new brakes, 4 new tires, new headlights, fluid changes, etc, etc. But it also covers when my wife unexpectedly cuts the tire on the curb and can't be patched, or the heat isn't working and it's freezing out so we have to take it in for repair. I'll probably cap it at $1500 per car, but in 4 years of using YNAB and $100 a month (2 cars), we're not even at $1900 right now.... and my car is only 3 years old so it hasn't hit any of the expensive maintenance yet, but my wife's car is 12 years old.

    As for the house... again, maintenance and repairs. The rule of thumb is 1% to 2% of the house value depending on the age of the house. Our house was purchased at $320k, so 1% is $3200, or $266.67/month. When we bought the house, we started with $3200 and have been funding it monthly ever since. After 4 years, we only have $5500, because we use it. Lawn guy, sprinkler winterizing and repairs, a new water heater, a broken pipe to the dishwasher that caused a water leak into the garage and required a new dishwasher, new washer and dryer, a snowblower, humidifers... we've need the plumber a couple times, and we had to have a freezer fixed... and also little things like 9V batteries for the smoke detectors every 6 months, lightbulbs, filters and cleansers  for the humidifiers, salt for the sidewalks. I'm sure I left out plenty of costs we use it for. There will be a new roof eventually.

    So I favor the monthly contribution because I'm also using the money. It's not just sitting there. Rather than lump sum it at the beginning and sit on it until it's needed and then replenish, I cashflow the savings from income every single month.

     

    I also favor funding every category the same every month because it gives you a better idea of your income vs. expenses when you don't have a long history of infrequent expenses. it lets you know if you are living below your means if you can fund a month of all your categories from a month of income and still have money left over. I do, usually about $2000 (unless my wife has a 3-paycheck month), and that extra gets deployed as we deem appropriate... 60% invested, the other 40% pads some wants to speed them up. We're debt free other than the mortgage, and that's at 3.125% so no hurries there.

    Like 1
    • nolesrule Thanks again for your comments. Your approach makes a lot of sense and I'm going to go through it in my mind a few times and figure out what works for me (which may very likely change as my budget matures).

      One of the best things about YNAB is the community!

      Like 1
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