True Expenses and Investments?
The way I've been budgeting is that each month I put most of my income towards next month's expenses (so last month's paychecks are funding this month's regular expenses) and then anything extra is put towards savings.
I've completed a 6-month emergency fund, and now I've been working towards filling up the rest of my True Expenses categories (trying to have ~$1000-$2000 for each category).
However, I want to start investing outside of my IRA/401k since having my money sitting in a savings account earning very minimal interest seems to be a bad idea. I saw something online (famous last words, I know) recommending once you complete your emergency fund, everything extra should just go towards low-risk investments like ETFs or Index Funds.
I was prepared to transfer all of my True Expenses money to a brokerage account, but then I saw that YNAB doesn't include money in the Tracking Accounts in the budget. So, if I decided to invest that money, I wouldn't be able to allocate it towards my True Expense categories.
I guess my question to the rest of y'all is, how do you guys handle your True Expenses and investments?
I'd appreciate any advice. Thanks!
We're not able to give you specific advice on investing. One thing you'll want to consider, however, is how liquid you need the money funding your True Expenses to be and how much risk you want to take on.
Personally, I have a low appetite for risk and want liquidity. So, I invest TE money that won't be used for 24 months or more in I-bonds and keep the money for TEs that will come due within 12-24 months in a high-yield checking account or in my checking account.
If your brokerage supports having multiple accounts, consider opening a "cash management" account with them; this is effectively like a checking account, and Fidelity (for example) allows you to keep positions in securities in the account alongside cash. I keep a short term bond mutual fund in there along with a pool of ready cash. YNAB treats brokerage cash accounts as budget accounts.
Just understand that trades often take at least two business days to settle to "real" cash and not "cash credit," meaning if you put emergency funds into securities, they won't be available immediately.
All that said, I do keep a portion of my "very long term TE" budget items in investments, especially since with today's economy "high yield" savings is kind of a misnomer.
1. Your True Expenses are all non-monthly expenses in your budget. So you should be funding them in regular amounts monthly as if they were monthly expenses. the difference is you just aren't executing the spending monthly.
2. Once you get to the point where you can send all income to fund all of next month's budget in a manner cover by my first point, then you can see how much extra money you have leftover each and every month.
3. Once you have determined you have leftover money, that money can be used to decrease high interest debt and increase retirement account contributions until they are maxed out. if those are properly taken care of in order...
4. then you can use any leftover funds to invest in a taxable account.
5. As the taxable account grows, only then should you consider also investing budget money, at which time you would put the investment account on budget and put the current balance in its own category. Any gains or losses would be sequestered in that category, as well as additional unneeded funds. When you reach this point of investing budget money, this category balance should be targeted to never be less than 50% of the high volatility portion of the investment account balance, or a downturn will hurt your ability to use your budget funds when you need them if they are invested.
It took me about 4 years of taxable investing in a strong stock market of only excess money before I moved to step 5.
I have my investments set up with Questrade: TFSA (Tax Free Savings Account), RRSP (tax free retirement) and RESP (tax free education). I have contribution room for all of them so I don't have a taxable account. My TFSA is in my budget but since it is long-term savings, I have a category called Long Term Savings. When I reconcile, any growth shows up in To Be Assigned, which I immediately put into my Long Term Category. I make sure the account & category are the same amount. If I need that money for a major large emergency that I can't handle with my other categories, then that money is accessible since it is not locked until retirement but I don't want to touch it. The other accounts are tracking accounts only & I reconcile them but they don't affect my budget.
I pay myself first. Even when paying down debt, I still contributed to both accounts $100 each paycheque so that I was in the habit of investing. My HELOC is gone this month and I have snowballed that money towards saving to buy out my car in August. Once that is gone, then I will snowball a portion of that money into my investments, some to increase my mortgage, renovations, & travel. Playing with investment calculators inspires me to see my money grow which makes me want to have no debt & just investments!
One thing I have noticed with the True Expenses categories, is that just because the money is there doesn't mean you can spend. I separated my annual expenses (true bills throughout the year) from the true expenses sinking funds. For example, if there is a lot of money in the gifts category, I might not be as frugal. These categories and my emergency fund are in a tax-free high interest savings account with EQ Bank at 1.25%.