Allocation vs. Forecasting Budgeting
I have been using the EveryDollar application from Dave Ramsey for the past couple of years. However, there are some things about that app which I have to take some issue with. These are some of the things I've found between both of the applications in the past week:
- Good for Forecasting - The creation of budget items is very simplistic and very easy to see at a glance.
- Good for a strategic overview - While the forecast will help plan how the month will play out overall, it does not have that capability of stating which dollar is getting spent WHEN during the month
- Excellent allocation budgeting - You know when you have dollars to spend on what category
- The goals category allow you to do some planning for the month, though you don't have any income goals for the real strategic planning.
So it would seem to me the ideal software would be some mix between the Ramsey and YNAB solutions. Ramsey to show what you anticipate coming in for the month to be able to set goals against, and YNAB to track spending against goals.
My question is, what do people using YNAB do to ensure their goals do not outpace their income using YNAB? Or do you use some other software for that piece?
Get to the point where you can use all of one month's income to fund the next month's budget. Most of us who use YNAB have never really needed more than that. If you have variable monthly income there are techniques you can use to smooth it out so you can make your months the same.
The fundamental question is whether you are funding each category to reach your target goal at the target time, but that doesn't require forecasting. It requires knowing how much you need to fund each category every month and then actually doing it.
I agree, and am working toward that. What I would like to be able to make sure of is that my goals are not exceeding my monthly anticipated income (for me being salary, it's a set amount each month).
Even if I had something where I could enter in all of the anticipated income streams and the goals line could let me know the over/under for the month it would allow me to see progress toward getting to that month-ahead state. It would also allow my me and my spouse to plan for larger purchases and make it easier to say whether or not we will be able to afford something or how long we will need to save to accomplish a spending goal.
The underlying point is that if I don't have something stating whether or not the income will match the goals (particularly for those goals that are more variable in nature such as larger expenses), it becomes more challenging to set appropriate expectations and can create arguments rather than solutions where we are moving forward together.
Select all categories.
Look in the inspector at the total underfunded.
Or, use the Toolkit to display total goals without the selection click.
This works best at the beginning of the month, before you've allocated and wammed (used rule 3).
This will also work if you've fully funded your target savings by date goals, then advance to the next month to see a clean slate.
Alternatively, if you're not exclusively using last month's money for this month's budget, I'd really recommend using paper or a spreadsheet to decide what your monthly allocations will be. The reason for this is that I find it easier to fiddle with the numbers outside of YNAB. If I had originally wanted to allocate $1500 more than I would get, I could play with cutting categories until my priorities matched my financial ability. If you do this without being able to budget the whole month on the 1st, you can easily run into SFTF (Stealing From The Future) issues or the accidental typing over of a budget cell that already has rule 3 activity. Those are harder to track down. Besides, I can see all my categories at once when I wrote them on a paper. I can't on YNAB.
When you can stretch your paycheck to last long enough to allow you to budget a whole month at once, the external planning is less important. This is my opinion, of course.
There seems to be an emphasis on setting goals from day # 1 in YNAB. I have to say that this would not have worked for me, so luckily the goals features were not available to me in the earlier version of YNAB, when I began using the software. I really needed a few months of getting to know my numbers.
Even though I was a budgeter before YNAB, I had no real sense of how much I really spent because I was one of those who chronically overspent by little amounts in all my categories in month # 1 by telling myself I would spend less in months # 2, # 3, etc. After three months of using YNAB and moving funds around to just deal with overspending, I had an eye-opening education about how much I spent on everything. It finally made clear just why I wasn't hitting my savings goals.
Because I have a predictable monthly income, getting an accurate baseline on spending first was an essential precursor to knowing how much "extra" there was in my monthly budget, and since it's the "extra" that funds those longer-term goals, it also made clear to me how long it would take to build up my "extra" into a specific goal amount.
Assuming consistent income, there is zero need to forecast because of Rule 2. If I were to copy a budget entry forward for the next 12 months and then add it up, it's hardly a surprise it will exactly equal what I need to pay the bill. Those redundant months are completely unnecessary, and the ONLY thing that matters is whether budget entries fit within my monthly income constraint.
Now, expand the scenario to include variable income. In my view, the better approach is not to change the above budgeting process that is known to work. Rather, the thing to change is to normalize income, much like we do for expenses. Bam, now I'm back to the consistent "effective" income.
With such a process, I KNOW I can afford EVERYTHING in my plan... all without flipping through multiple screens.
Hot Pink Welder said:
when an adult son or daughter moves back home (for example), it would be nice to be able to predict the additional strain that will add on the budget for things like food, electricity, fuel, etc.
Forecasting won't tell you those things. Past history or extrapolation, e.g., multiplying water usage by 1.5 (3 people instead of 2), tells you those budget entries.
Since those things are presumably high priorities, something else of LOWER priority has to give up funds. Forecasting doesn't tell you that either. The relative importance of various categories drives whether it gets funded or not, as we have to stop when the total exceeds expected income. This is true for both an allocation budget or a forecasted budget.
Hot Pink Welder said:
I'd like to be able to see how much of the paycheck remainder this will eat up.
There should not be any paycheck remainder. The relevant question is what is being funded now that cannot be funded later. Hint, it should be the least important things in your priority hierarchy.
Hot Pink Welder said:
see progress toward getting to that month-ahead state
This is easily done with a category, as you have to save to get ahead. When you are paid, budget what you need in this month's area. Budget everything else in a holding category (many call this "Income Next Month"). In next month's area, move those funds from the INM category to TBB and budget as desired. (This results in a negative budget entry in the INM category.) Then simply repeat.
The kicker is that when you budget to the INM category, you'll add to the existing, negative) budget entry. If you wind up with a positive budget value at the end of the month, then you're clearly making progress.
As a heads up, after you're reached the point where you don't have to budget anything to the current month, you can switch to a similar but more efficient workflow that avoids the need to budget with every income arrival.
Tracey Daniel The toolkit extension I referred to is a Chrome plugin. To my knowledge it is not maintained by YNAB itself, but has active developers who are interested in the YNAB community who work toward enhancing the YNAB experience on your browser. You can check it out on the chrome store (toolkit for YNAB is the name of the plugin I believe).
Coming from someone who has used a forecasting tool called Debtinator for the last several years this really helped me frame my mind around how everything works. When I first learned there was not a future piece to understand the age of money and how to determine how much extra I might be able to spend on a debt I think my brain broke haha!
I didn't see it mentioned but scheduled transactions and the running balance helps one to look ahead in YNAB. I can see my future month of activity at the top of my checking account and what my checking balance will be at all times during that period as well as future bills such as property taxes, car registration, and yearly homeowner's insurance.
There is a forecasting element to YNAB as you're setting yourself up to handle all future situations via Rule 2: Embrace your True Expenses.
Before YNAB, I used a Google Sheet to keep track of what expenses were coming up and which paycheck I needed to pay them out of. I've just continued using my spreadsheet to help keep my mind right about what is upcoming. I realized I got kind of panicky without knowing what was around the corner. I fill out the spreadsheet with a generic budget (Paycheck A = mortgage, insurance, food, gas; Paycheck B = Electricity, Gym membership, food, gas; etc.) and add things that I know are coming up. Some people are more organized and add money to each category little by little to fund coming expenses. But I'm still working on that and my spreadsheet eases my mind!