The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: elaine amj on April 18, 2016, 01:19:42 PM
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When tabulating your expenses for the month, do you include money that you have set aside for sinking funds? I have been using YNAB since October and my main goal is to get a better grasp of our annual expenses as we prepare to FIRE in 1-3 years. I've been wrestling with this in my journal (with some awesome feedback) and figured it's time to ask the larger community what approach will help me meet my goal best.
I have a number of fixed sinking funds set aside - house taxes/insurance, home maintenance, car repairs, etc. I have been recording any money set aside for these as "expenses" for the month. I figure that even if I don't use it this month, I will use it next month or next year. These are "fixed expenses" so there is little variation (side note - I'm finding I really like considering home maintenance a fixed expense and budgeting money towards it every month. When the inevitable big costly repair comes up, Ill have money already set aside for it!). This smoothens out my monthly expenses, helping me to see if I am close to my targeted monthly spending. I figure this helps keep my goal oriented on a monthly basis.
I also have non-necessary sinking funds like vacation, Christmas, birthdays, kids activities, etc. I have been recording only the actual amounts spent. My reasoning is that there is so much variation with these numbers and while I typically spend all that I have budgeted for it over the course of a year, these can be increased or decreased based on needs.
I'm starting to think I should start only including actual spends. But then I worry about things like home maintenance and car repairs. Say I have no big bills this year and have $2000 sitting in those categories at the end of the year. I will be keeping them there as it is entirely likely I would need it the following year. Which means my annual expenses would be under-reported by $2000. Multiply this by a few other categories and this could certainly affect my FIRE number.
Hmm...perhaps the best solution is to just tack on an extra $5k a year to my expected annual expenses for this and other life unknowns. That would add $$ to my FIRE number though :(
Feel free to tell me I'm being ridiculously complicated and point out the obvious-to-everyone-else-but-not-me solution :) :)
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Yes.
For example -anything I pay for once/year I divide by 12 and include on each month's expense sheet. Similar approach for once-every-x-years expenses (e.g. car, new roof)
People get in trouble because they only plan for expenses which occur every month. Then something predicable happens like needing to replace a car* and they suddenly don't have the cashflow.
*you may not be able to predict which month (or even year) a car will need to be replaced, but not factoring in its eventual replacement is folly.
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Do what works for you. For what it's worth, I also have various sinking funds for vacation, car, and future house stuff (down payment savings at the moment). I like to see things partitioned out for their intended purpose.
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There's nothing right or wrong about doing it that way. I think about this topic from time to time as well. It comes down to two different aspects.
1. Practically speaking, what is the best way to manage my cashflow. There's alot of advice on this forum about keeping an "emergency fund" cash cushion. I think that's incredibly useful advice for anyone, particularly just starting out. MMM wrote an article about the costs of such a cushion, something like cash cushion vs. springy debt. His argument went something like, at some point, once you're...you know...rich...maybe it's OK to just have a floating low-interest line of credit you can pull on, like a Home Equity Line of Credit (HELOC).
2. What's my FIRE number really? If my annual spend is absolutely going to include an item, such as property taxes, then I include it in my annual spend. But other things are optional. Think of a home maintenance task like painting a bedroom. That isn't likely to be an urgent task. So it isn't a big deal to put my hands on some money to do that. If it blows my budget for this month, I can adjust some things, maybe do it next month. Once I'm FIRE, I can wait for a really good day in the market and sell a share of something. In any case, I'm not likely going to run into sequence of returns risk by having to sell something at a huge loss to pay for some paint.
But what if the maintenance item is a new roof? Well, that's where the HELOC comes in. I can get right to work on that roof, and then over the next few months figure out what to do about paying for it, either working a little bit part time (the horror) or adjusting down some spend in other areas. Or waiting for that really good day in the markets.
Hopefully the urgent need for a new roof is because an insurance-covered windstorm came in and so it doesn't matter, because most of the really big expenses I might slam into are covered by insurance. So there's a cap to the HELOC-expected expenses in a given year: my insurance deductible.
I don't know what the right answer is, and it varies by person. For my part, I am still working, so right now I cover these things out of new money, going into my second year of not keeping a cushion. Not sure the aggravation of having to keep such a close eye on the checking account is worth it, but it is an experience. Like when you were planning to sell some VTSAX to pay for property taxes and the markets have their worst opening week ever. Flexibility remains key.
As long as you don't forget that these bigger ticket, non-monthly costs are on the horizon, you should be OK. My annual spend number, and thus my FIRE number, include things like property taxes and insurance, as well as all my other monthly bills. But my budget as a whole is annual, not monthly.
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Do what works for you. For what it's worth, I also have various sinking funds for vacation, car, and future house stuff (down payment savings at the moment). I like to see things partitioned out for their intended purpose.
I totall agree about having sinking funds. Never had it before but sure love it now. I'm just wrestling with whether to include it in my expense summary each month. My main goal is to know my average expenses for FIRE so trying to figure whether to use budgeted numbers or actual numbers.
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Here's how we handle this kind of expense:
1) we make a yearly budget (we call it "short term savings") for all these things--HOA dues, Christmas, car insurance, larger home improvement projects, saving up for vacation, saving up for an eventual car replacement. This budget is handled as a separate budget
2) we include tax refunds in this budget (as a credit)
3) we divide the net spend by 12, and transfer that much money from our checking account to our savings account each month. This transfer is a line item in the monthly budget.
4) when we spend money (for example, a vacation), it gets paid out of our checking account, and we then transfer the same amount from our savings account to our checking account.
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I no longer include sinking funds except for the known ones, like TheOldestYoungMan does. At the moment, that's property taxes. This is only because the sinking funds had grown to such a large amount that it became meaningless (the car fund, for example, had grown to $200*120 months).
Tracking a budget for 10+ years gives one a good idea of the highs and lows.
As an aside, we're building a house and the money spent on that is not included in the annual expenses since including the extra $60k doesn't provide any additional insight.
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I'm still using Excel to track sinking funds. We have "annual" type expenses like HOA dues, car insurance and registration, subscriptions, etc. that I just divert $x/24 paychecks to in a savings account. We also use it to track "goals" that are "wants" but take a significant amount of money, like a vacation. I look at these things like a monthly bill that has to be paid, regardless of when the cash actually goes out. It just helps me and my wife think about where the money is going. If we just had one giant pool I think we'd have trouble sticking to the budgets for our goals. Realistically, would we take money from one category to accelerate a purchase in another? Sure, but at least we would have some black and white numbers to evaluate the trade off.