Looking for advice on a yearly budget

I have been using YNAB for a week or so now, and I like it. I am getting used to it. It is way better than Quicken's budgeting. The easiest budgeting I have ever used was Andrew Tobias Managing Your Money (rest in peace).

My number one objective is to budget yearly.

I am retired, but too young for Social Security or to start my pension, so I am drawing from retirement savings.   My Financial Planner has run Monte Carlo simulations, so I know that I have 90% odds of not outliving my money if I can hold annual spending to a certain number.   

Month to month, I withdraw money from savings when I need to - enough to pay credit cards in full, and handle any bills.   I have several discretionary items that I could spend money on - say a kitchen remodeling or a vacation - that I am quite willing to do if I can stay within the annual budget, or I can save and do next year.   

Spending is lumpy. Some months have taxes, large insurance payments, etc, where other months are more normal.   December is a big lumpy month.  Every few years I will buy a car - paying cash - but again, not if I am outside the yearly budget.

So I am trying to see how I am doing against my annual budget so I can see how much I need to allocate to the must-do's like taxes - versus controllables like dining out - versus nice to haves like a vacation.

One idea that I have had is to create a dummy category in the Tracking area where I add an account called Yearly Budget. I could transfer money from this account into  TO BE BUDGETED state, and roll through the year. I have a pretty good handle on historical spending through years and years of Quicken. 

I would welcome any ideas - or you can tell me that this is totally against the YNAB philosophy , but I still would like to know where I stand.  Maybe a spreadsheet is the answer.

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  • Hi Turquoise Lobster !

    Forecasting has its place, but we have found that it can interfere with the benefit you get from budgeting, because it takes the focus away from making the best decisions with the dollars you have right now. We talk more about this in our Think Long, Act Now Guide and this Why We Don't Forecast Whiteboard Wednesday.

    While forecasting is against the YNAB philosophy, we do understand that looking ahead is important. We don't suggest entering possible income to inflate your actual income, but have you thought about creating a separate 'What If' budget? That would allow you to look at a possible overview of different scenarios, without changing your actual budget. 

    If your'e comfortable with Excel, a spreadsheet could also help, but I (personally) find them more difficult to navigate for budgeting needs.

    I'd love to hear which way you decide to go! :)

    Reply Like
    • Faness Thank you for the idea of the 2nd What If? budget. This will enable me to follow through on the YNAB methodology while trying to answer my question about annual expenses. I think I understand the four rules, but I have purchased the YNAB book from Amazon so I can make sure.

      Reply Like 1
    • Turquoise Lobster It may sound slightly bias, but I'm a huge fan of the book and I hope you like it, too! :)

      I love how much feedback you've gotten on this topic! I hope it's been helpful!

      Reply Like
  • When I first read you wanted to create a yearly budget I thought wow, that is a huge project, then I read on. 

    I'm in the ball park of where you are so have been giving it some thought.  What happens when it's time to stop adding to and start drawing from retirement funds?

    Looks like you want your accounts to provide you with a yearly salary and you want to break it down into monthly amounts.  Is that close?  Budget so much every month for December so you know you have it when you want to spend?  And so much per month for the other irregular bills? 

    Reply Like
    • TryingToGetAhead Yes, the issue is that YNAB relies on external constraints, like your paycheck, your pension, etc. to force you to make decisions and priorities. In my case, the fox is guarding the hen house. My retirements assets are in a revocable trust, and I am the trustee.  So I can withdraw whatever I want whenever I  want. But I have the constraint of the annual Monte Carlo analysis target.

      My assets generate income (dividends) that fund roughly half my spending. This means the other half of my spending requires selling assets. So if I do this too much, or if the market has several down years early in my retirement, then I am in danger - hence the Monte Carlo analysis. 

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      • MsTJ
      • Gray_Nomad_f6eeb59e1a1c
      • 1 yr ago
      • Reported - view

      Turquoise Lobster You are complaining that you can't budget more than you have?  I don't understand?  Why are you chosing to limit yourself with the Monte Carlo analysis?  

      I had understood you have an amount, you have determined you can afford and that you want to make sure it lasts the full year.  It appears I misunderstood.  If you cannot afford the annual amount you determined you want to spend, that is something else entirely and I have nothing to add to that.  

      Reply Like
    • TryingToGetAhead No complaints here.

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  • Hi, Turquoise Lobster

    I think you might tap Patzer on the shoulder to ask this kind of question. He is an experienced YNABer and a fairly new retiree. His journal is linked here:

    https://support.youneedabudget.com/t/k91hx8/patzers-journal-10-years-later

    if he doesn't see my ping on this thread, you could post on his journal to get his attention and bounce ideas off him.

    Reply Like 1
    • HappyDance Thank you!

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  • Hi Turquoise Lobster ,

    While my circumstances are very different, I also wanted a yearly budget.  I don't really care that YNAB thinks you shouldn't forecast; I'm debt-free and use YNAB for wealth management.  I want to make sure I save a certain % of my annual income and I find that budgeting yearly really helps me achieve that goal.  When I get my annual raise, I sit down and figure out how much I want to save, how much I need to spend on living expenses and how much I want to spend on travel, social events, etc. for the year.  I then divide by 12, budget the first month accordingly and copy the budget for the following months.  For myself, I don't care about red TBB, so I leave my investments off budget and let future months stay red.  If that would bother you, you could put your whole spend for the year in TBB.

    Reply Like
    • Cyan Rhythm Yes. I think that "Embrace the Red" is in my future. Thank you.

      Reply Like
  • Turquoise Lobster said:
    I am retired, but too young for Social Security or to start my pension, so I am drawing from retirement savings.

     I have been retired since September 2016.  While I am drawing Social Security on my deceased ex-wife's record and have a small pension, the majority of my budget is funded by my investments.

    Turquoise Lobster said:

    Month to month, I withdraw money from savings when I need to - enough to pay credit cards in full, and handle any bills. I have several discretionary items that I could spend money on - say a kitchen remodeling or a vacation - that I am quite willing to do if I can stay within the annual budget, or I can save and do next year.

     Here is where you are looking for something that is outside the scope of the YNAB mission.  That doesn't meant that YNAB can't help you, and it doesn't necessarily mean that you don't need what you're looking for; but it does mean that you need to think more broadly than just about YNAB.

    It appears that you are contemplating a traditional forecasting budget such as is commonly used by businesses, governments, non-profit organizations, and retirement planners.  In a forecasting budget, you forecast income, forecast expenses, and afterwards look at  a variance report showing how you did against the budget.  It's all based on the income statement.

    In contrast, YNAB is an allocation budget.  It works off the balance sheet, or a portion of your balance sheet.  You take what's in your checking, savings, and cash, and decide what that money will be spent on.  What many people don't immediately realize is, this includes money that may not be spent for a long time.

    In my budget, I have categories with names like "Home Improvement" and "Car Replacement."  My planned time frame for replacing cars is every 10 years.  If I have to absorb the cost of a car within the budget for a single year, I can't pay cash.  But if I budget for the cost of the car over the course of a decade, by the time I need to buy the car I can simply transfer money from on-budget savings to on-budget checking, and write a check to the dealer.  That is precisely what I did last October, and having a hard budget cap (the dollars allocated to the Car Replacement category) made me a less bad negotiator than I otherwise would have been.  Who knew that a car salesman would actually understand and work toward a  hard cap that includes sales tax and all the dealer fees at closing?  (He called it an "out the door" price, a term I had not been familiar with before I went in to buy a car.)

    Now, I can't forecast my expense budget for a year with enough accuracy to be worth the effort.  I can't even forecast how much I'm going to spend for groceries in April within 10%, and the month is almost half over.  What I can do is allocate funds to categories in YNAB, look at how the month came out, and re-allocate unused funds as appropriate the next month.

    Turquoise Lobster said:

    Spending is lumpy. Some months have taxes, large insurance payments, etc, where other months are more normal. December is a big lumpy month. Every few years I will buy a car - paying cash - but again, not if I am outside the yearly budget.

    YNAB deals with the lumps by allocating money to where it is needed.  I have lots of lumpy categories.  There are required lumpy expenses like property taxes.  There are discretionary lumpy expenses like vacation.  There are somewhat flexible lumpy expenses like car replacement and home improvement.  The key is, I manage the budget to have the funds in the category before I spend on that category.  And because YNAB is a balance sheet based budget, those category funds are backed by real world dollars.  I have no need to incur debt for a new car or a home improvement as long as I spend no more than what is available in the category I'm spending.

    Turquoise Lobster said:

    So I am trying to see how I am doing against my annual budget so I can see how much I need to allocate to the must-do's like taxes - versus controllables like dining out - versus nice to haves like a vacation. 

    I approach this by separating my investment portfolio from my budget.  Yes, the investment advisor who runs her Monte Carlo analysis puts in a number for cash held elsewhere, which is essentially my budget.  Doesn't matter.  For monitoring purposes, I can treat the transfer from investments to budget as an expense for the forecast budget, and as an income for the YNAB monitoring budget.  If I make this the same amount each month, it's much like budgeting while on a salary.  The investment portfolio sees stable withdrawals, the budget sees stable income, and I allocate/accumulate by categories as needed.  Just like I did when I was working.

    There are some minor differences from the working world.  When working, I'd salvage unused funds from monthly spending categories, re-allocate them to "brokerage,"  and "spend" them by transfering the money to my brokerage account.  In retirement, cash flow between the brokerage account and checking is reversed; so the salvaged funds serve to reduce my required draw from investments the following month.  There are details of how I do this, but they aren't as important as the concept.

    Fair disclosure:  The current incarnation of YNAB has many features that are designed for people who are living close to the edge of overdrafts or incurring credit card debt for normal living expenses.  Some of these features are inconvenient for my situation.  I work around them, and do not follow the official YNAB recommendations in many cases.  How I do this is not particularly important for this discussion; the important thing is to think about what is needed, and how much of it YNAB can provide.

    The YNAB budget is an important tool for me in retirement, but it's not the total financial picture.  Right now, my YNAB budget is managing about 2.2% of my net worth.  That happens to be a very active 2.2%, and it needs to be managed; but it's far from being the total picture.  It is very important for me to understand what YNAB does, what it does not do, and how it fits into a comprehensive financial management system when I am in the position of being able to choose my monthly income by how much I withdraw from investments.

    In this system, I have never needed to do an annual expense forecast.  I forecast expenses at the category level, in time frames appropriate to the category.  Property taxes are paid in February and September.  Auto insurance is paid every six months.  Some of my utilities are paid monthly, others are paid every three months.  I plan to replace my car every 10 years.  Home Improvements and Vacation categories get some regular money, and additional money as available and as I want to do something; but the money doesn't get spent until after it is budgeted.  Yes, it was a lot of work to get this set up right; but that was one time work ten years ago.  It's a very reasonable amount of labor to adjust the budget for changing circumstances.

    I do an annual revenue budget.  At the end of the year, I look at how much my health insurance will increase, which I expect to be more than inflation each year.  I look at what other expenses have increased in the last year.  I adjust my part budget for that, and look at the answer.  If there are no large surprises, it will come close to the estimated monthly budget increase I guessed at a year ago.  Then I revise my part budget for the new numbers, and revise my planned draw from investments for the coming year.  During the year, I'll treat that draw as a maximum and live within my means, before giving myself another raise for inflation the following January.

    I also do some analysis of investment income and performance, and look at how well my investments cover my required budget draw; but getting into that is more about investing and less about budgeting.  Assuming only that you have an investment system that can produce a predictable monthly distribution, you can use YNAB to manage expenses to stay within that distribution.

    Reply Like 5
    • Patzer Thank you for the very thoughtful response. It is clear that you have some of the same issues and it is very enlightening to see how you have approached it.  I really appreciate it. You also confirm that maybe YNAB is not the tool for what I am trying to do, although I am still intrigued with using YNAB to get a forward look at my spending. Quicken is great for the rear view mirror.

      It is interesting that you are taking funds out of your investment accounts and putting them into low interest accounts to fund long term goals like car replacement.  I am conflicted on this. I can see how this approach really makes sense for, say, a child's college tuition, where if the market took a 30% hit, it could have a huge impact (or for a car).  However, for most smaller expenses, say real estate taxes, I have been content to keep the money in the investment account and withdraw only when I need it.  I think of this as "reverse dollar cost averaging".   Over time, I am getting 6% to 8% on the money. Last year, I did considerably better. This year, considerably worse.   It seems to me like whether you take the money out and put it in a risk free investment or whether you keep it invested, you are making a bet on the direction of the market. Your way is more conservative (meaning safer) for sure.

      So I may take a shot at using a dummy investment account, filled with my annual budget. Then withdrawing it over time to match my actual withdrawals, but funding the budgeted expenses from the dummy account so I don't exceed the budget. Your way has appeal, because I would be insulated in the short term from the ups and downs of the market, but for small amounts I can, as they say, roll with it.   Over time, I may shift to your method. I will have to explore my tolerance for green versus red.

      I am with you on the annual healthcare increases. Ours went up 33% this year. It is crazy. 

      I read your journal posts. Very helpful! I bet we could have an interesting discussion on investments, but as you say - that's a different forum. 

      I am reading Mr. Mecham's book, so I reserve the right to get religion and switch to your way. Thanks again!

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

      Turquoise Lobster 

      Turquoise Lobster said:
      It is interesting that you are taking funds out of your investment accounts and putting them into low interest accounts to fund long term goals like car replacement.

       If I may digress into discussing the interaction of budgeting and investing, this is not as bad as you might think on first blush.

      A very common recommendation for retired investors is to keep 5 years' expenses in cash or near-cash.  If I scratch the surface of this strategy, its proponents will say that it's really 5 years' worth of draw from investments, i.e. it doesn't include the portion of my expenses covered by Social Security and a pension.

      If I ask why so much, the typical argument is so that when I need cash, I won't have to sell in a down market.  Sometimes the example of a large expense such as replacing a car or a roof or repaving a driveway is mentioned.  But this is coming from people who don't live by a budget like YNAB.

      With the YNAB budget, I have the car replacement and the roof replacement and the driveway repaving covered by budget funds that are backed by cash.  Right now, the sum of my budget is just a little bit more than one year of required draw from investments.  It's less than one year of my monthly par budget amount.  And it's big enough that I'm not worried about covering those large expenses that might happen to occur right when the market is down 40%.

      In my investment portfolio, I hold some cash.  One year of forward-looking budget draw (including an estimated raise occurring next January) is reserved for the budget.  The rest of the cash is available to invest.  Other than the cash reserved for budget, right now I am very close to fully invested.  I don't care if the market drops 40%, because my investments throw off substantially more cash than I need to use to fund my budget.  Yes, most of my dividends are quarterly and they aren't evenly distributed by calendar month; but keeping a year of cash enables me to turn a lumpy but predictable stream of investment income into a smooth monthly flow of budget funding.  And over time, there will be investment income available to reinvest.  That's a guard against inflation.  Yes, it's possible that there will be dividend cuts; that's why I diversify my holdings.  It's also common and expected, that many of my holdings will increase their dividends each year.

      Long story short, I'm ultra-conservative in my budget, not risking principal to anything other than inflation.  The most aggressive thing I have any budget funds in is I-bonds.  But my financial advisor regards me as extremely aggressive for my age in my investment portfolio.  What makes that aggressive stance work is, I can afford to sit and do nothing if the market tanks.  What enables me to sit and do nothing is the fact that my investments throw off more cash than my budget needs.  With appropriate management, that enables me to have less cash than is commonly recommended, and sleep very well at night.

      I'm not worried about getting 1.5% or 2.58% on budget funds in a savings account or an I-bond, because I'm getting a 4% average yield (varies with market value) on investments that also appreciate in value over time.  I have taken to putting some of my pre-budget cash in the taxable brokerage account into T Bills for a better yield than the sweep account and avoiding state income taxes.  I have also put some of the pre-budget cash in retirement accounts into very short term corporate bonds (6 to 9 months to maturity) for a slightly better yield than T Bills in accounts where taxes don't matter.  Given a structure with a known maximum monthly budget draw, it's pretty easy to figure out how much I can afford to lock up in T Bills for 26 weeks, 13 weeks, or 4 weeks; and I can get them at auction with no trading cost and not worry about the spread.

      Long winded answer, I believe being small minded about getting every last basis point of possible return before I need to spend money carries more risk than I am willing to accept; but if I avoid that risk, I can afford to carry more investment risk than my financial advisor thinks I should accept.

      Oh, and the car . . .  on October 1, 2017 my budget was on track to replace the car in November 2017.  On that date, I thought my existing car would last another 2 or 3 years.  The back of my head idea was to keep funding the Car Replacement category, keep driving the existing car, and maybe get a nicer car when I had to retire the existing car.  Then my daughter's car died, right when she could not afford to replace it.  She needs a car to get to work.  So . . . I gave her my existing car, and replaced my car one month earlier than originally planned, on 3 days' notice.  I took delivery on October 17, 2017.  Life happens.  If I had not been keeping real money to back the Car Replacement category, I would not have been able to do this.  Because I did, it was a minor budget adjustment of taking one month worth of Car Replacement budget from the Unexpected Expenses category and going car shopping.  I decided I'd buy a car on Friday, agreed what car on Monday, and picked it up on Tuesday.  I wrote a check.  This was possible because I started budgeting to replace the car in 2008.

      The car replacement thing worked out so well the first time that I'm doing it again.  My projected car replacement date is October 2027.  My projected amount is 33% greater than what I paid in October 2017, figuring there will be inflation.  That means my going forward monthly amount for Car Replacement is 33% more than what it had been for almost a decade.  And that's okay.  I can manage that situation.  I can't budget for a lump of money to buy a new car all in one year.  It's too big relative to my monthly budget income, and I'm not willing to spend down the principal of my investments.

      Reply Like
    • Patzer 

      Patzer said:
      With the YNAB budget, I have the car replacement and the roof replacement and the driveway repaving covered by budget funds that are backed by cash.  Right now, the sum of my budget is just a little bit more than one year of required draw from investments.  It's less than one year of my monthly par budget amount.  And it's big enough that I'm not worried about covering those large expenses that might happen to occur right when the market is down 40%.

       That is a great way of looking at it, and a way to take the Monte Carlo analysis out of the picture. If you never spend principal, you don't have to worry about outliving your assets.   In my case, I could almost get there if I switched my Fixed Income portion of my portfolio into high dividend stocks, but then I would lose a big diversification benefit, and I am already overweighted in Value stocks.  So I would not sleep well at night, and with my current allocations, I do. (I realize that that is not what your portfolio looks like - but that is what would happen to mine.) 

      I am 60% 40% equity and fixed income and cash, and within the equity, I am mostly in DFA funds which cover the broad US market with a slight overweighting in small companies and value companies, a broad international fund, and a REIT fund.   For Fixed income I am in short term bonds, intermediate term bonds, and inflation protected bonds. 

      I had this conversation earlier this year with my investment advisor. It is frustrating to have 40% of the portfolio yielding very little.  They were suggesting moving a large portion of the fixed income into a fund of high dividend stocks (think utilities).   The next day, the market lost a large amount and has been very volatile. This reminded me why I had the Fixed Income, because my losses were much lower than the market losses.   On the other hand, I picked the REIT fund because of the diversification benefit - even though it does not fit well in a taxable account. But I am rethinking this because REITS get market weight in the broad US fund, and so I am overweighted in real estate.  We are trimming that. 

      The other thing that keeps me from funding retirement out of income is that we are paying about 1% in investment fees, where if I managed it myself, I could do it for about 15 basis points. But my wife gets a vote, and her concern is that if I pass away first, she would be lost without the advisor.   Some fights aren't worth fighting.  And if things go wrong with the market, we have someone to blame besides me. I give broad direction to the advisor, and he handles the day to day.

      Having said all that, I could easily set up a "cash garden" within my investment accounts, and have it off limits for investments. Or a savings account. I am going to think hard about that one.  

      Thanks again for your thoughtful response. Not only do you understand the issue, but you tend to come up with different answers than my default answers. This is of huge value because it makes me challenge my thinking. 

      Reply Like 3
  • A quick update...

    I have been using YNAB and the four rules in my main budget, and I created a forward looking budget for the rest of the year as a separate budget with all the same categories.

    Both are insightful.

    The regular YNAB budget is interesting. The first thing it does is make me get rid of the float in paying my credit cards. I pay them off every month, so when I budget for the payoff amount for the statement that was pre-YNAB, and then get automatic cash allocated for spending post-YNAB, it has the effect of eliminating the float - even though I will physically pay the bills on time as before. This has the effect of increasing my bank balances and is a more conservative stance, so I like it.   It is sort of like aging the money. I put about 80% of my spending on credit cards to get the points, so my "age of money" was about negative one month. Going to YNAB sets me back to zero. And I can see in a few months I will be +1 or better.

    The other interesting thing about my vanilla YNAB budget is that it really does force me to make choices on priorities.  When I am trying to fit the spending into a non-float budget, I have to decide which True Expenses to not fully fund, knowing that I will have to make them up next month. This is painful, but valuable. 

    The forward looking budget is valuable, too. I can see that if I continue at current course and speed, I will end the year with a surplus of about 1.5% of the total budget. Which is good, but not very resilient to shocks.   I have been paying off my home mortgage quickly by sending an extra $1000 to principal each month. This will let me pay it off within 7 years. My rationalization was that this should not count against my yearly spend budget because I am just moving the $1000 from one asset category to another each month. And I could just write a check for the full remaining balance. But, it would definitely be more conservative to fund the pre-payment out of the main budget. However, YNAB is making me think that it may make more sense to stop the accelerated payments and spend the $1000/month on other unfunded priorities.  Or make the pre-payment just one of several uses for the money. 

    The other thing I am thinking about is setting up a fixed schedule to get income from my investments for the rest of the year, rather than waiting until I need the money to pay bills. 

    Thanks to all for the helpful comments.

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

      Turquoise Lobster Thanks for the update!  It sounds like things are going very well indeed for you, and you're finding the same benefits from YNAB that I found almost a decade ago.  Even though I had been doing okay without a budget for many years, the clarification of priorities that it gave me was a game-changer.  That, and the quantification showing me when I could and could not afford to spend money on some large, infrequent purpose given all the other priorities I have.

      Maybe I didn't need a budget for years, and maybe I don't need one now; but having one is very helpful.

      Reply Like 2
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