Starting up with large savings: Distorted view of ongoing cash flow
I'm back with YNAB after a long hiatus, and relearning some of the core concepts, so apologies if this has been answered elsewhere:
How do you ensure that a large savings balance, doesn't distort your real monthly case flow.
As my wife and I have currently constructed our budget, we have funded all our January priorities (Immediate, True Expenses, Quality of Life) , and have enough left over to do the same for February. I'd quickly note this isn't because we're super high income, or have been especial frugal. We've wasted a lot of money over the year (why we're back with YNAB), we just were the beneficiaries in late 2019 year of a one off financial windfall.
After February, that money will be fully allocated, and we're back to living on our monthly income. Is there any way to easily tell that we're ok for Rules 1 -4 in March at this point - or is that going to be an either 🙂 or 🤢 reveal in early March?
If our basic approach here is wrong, happy to hear that as well.
I know how you feel, I’m usually in the same situation. There’s always the net worth graph, but the much better way is to not budget any of the current month’s income until next month. Make a category and put all Jan. Income in it and then release it at the end of the month to budget in Feb. If you can consistently do this every month you will know you’re living within your means and even saving more to boot. We call this classic rule 4, Live on Last Month’s Income.
I just worked this out for myself. Instead of tracking overall totals, I'm now planning on tracking by month. What have I budgeted this month (income)? What is my activity (expenses)? The result is what I did this month. Hoping this will give me a better monthly picture. Hope you find what works for you.
I suggest you don't do February right now. Put the extra you have in an Income Replacement or Emergency category. All the income that arrives in January can be stashed in a holding category called Next Month's Income (or whatever). When you've received it all, move funds from the NMI category to TBB and budget February on your standard monthly salary.
To get a truer picture of your eventual on-going demand, you can use some of that Emergency money to "catch-up" on your True Expense categories. If you have an annual expense, for example, the long-term budget value will be 1/12 of the total. However, if the first outflow is due 2 months after you start using YNAB, you can put 10 month's worth of money in the category in that first month. This lets Feb. (and thereafter) use those "nominal" budget values. Do similar for the other recurring expenses; e.g., a quarterly expense due next month would put 2/3 of the expense amount in the category now, leaving the nominal 1/3 (=4/12) of the expense to be funded monthly moving forward.
It's not a windfall per se, but we get paid every 2 weeks, so twice a year there is a 3rd paycheck during the month. I spent the first year 6 months getting our monthly expenses under 2 paychecks a month. As it is expected income, but 'extra' so to speak, I use it to bolster any lagging true expenses. So as not to waste it, I spend some time thinking, what do I want to do with this extra money? I use a note app and log how I want to use it.
The first 3 check month after starting YNAB helped us get a month ahead so we could life off of last month's income. IMO, this is a game changer, especially at the beginning of YNAB when YNAB broke is very much a thing and I felt like I couldn't afford to fund our true expenses like I wanted to. The last 3 check month was November, the next May. November I added to the Christmas fund because I forgot the kids would like to purchase gifts for one another. I added a chunk to mortgage so I can pay extra towards principal every month. I put a chunk in our car replacement category because our oldest car is in college. I put a chunk in our vacation fund because I started budgeting a year ago and our big vacation is about 2 years worth of monthly contributions, so it's a little behind. A chunk went into hobbies, because my new hobby of sewing was being used to make presents for family. A chunk went into wish farm because my spouse wants very much to repave our driveway. Any extra above that went to plump up categories. This May I will again use the 3rd paycheck for vacation, extra mortgage principal, replacement car fund, paving, and probably the category New Floors because we after we replace the windows this fall, we want to repaint and replace flooring in all the bedrooms so my daughter can get her own room eventually. Any extra above that will likely go towards saving for a new mattress because ours is about 10 years old.
If you get a considerable windfall, you can always sit on it until you know what to do with it. I sat on an inheritance for about a year because I didn't want to blow it and have nothing to show for it later. We used part of it to pay for a financial advisor, who was the one to turn us onto YNAB. She advised how to best use it (for us a combination of invest, put into our kids' college funds, and use as a income replacement emergency fund). Part of it was to update our wills and trusts because that's a thing that I think I should do as a parent and vaguely responsible type adult.