Author Topic: YNAB and saving 50% of my income  (Read 4383 times)

cranilation

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YNAB and saving 50% of my income
« on: July 26, 2015, 11:20:44 AM »
I use YNAB to manage my monthly budget.
 
MMM's magic math says to save 50% of your income.


In YNAB, I have categories for all my monthly bills (rent, phone, groceries), and categories for all my saving-towards (new car eventually, christmas gifts, etc). 

So for this month, I've tucked away another $100 towards a new car, $50 towards xmas gifts, $50 towards future car repair, etc.

My question: Does this form of savings count as "save 50% of your income"?  In july I brought in $3,500 and spent $2,500.  I didn't put any of that $1000 into my "savings" category - instead it's distributed across numerous "savings towards" categories.

I'm not sure if I should count this as savings, though, because it will be spent eventually, right?  On the other hand, i'm not spending it now, which means I'm saving it, right?

morning owl

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Re: YNAB and saving 50% of my income
« Reply #1 on: July 26, 2015, 11:39:18 AM »
I usually count "savings" as money that I put away into investment accounts for retirement. Anything else that's not invested, but earmarked for short term use, is in a high-interest savings account. I don't count this as part of my savings rate, but rather as planned spending / emergency fund money.

Eta: I have a separate category in YNAB for this. There's the rainy day (planned spending) category, and also a "savings" category -- that's where I have my TFSA, RRSP and taxable investment account contributions.

fb132

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Re: YNAB and saving 50% of my income
« Reply #2 on: July 26, 2015, 11:45:02 AM »
I agree, long term savings is considered as savings on my part, while I don't count RDF as savings.

wordnerd

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Re: YNAB and saving 50% of my income
« Reply #3 on: July 26, 2015, 11:53:26 AM »
No, I don't think money that you're planning to spend should count as savings in this sense. I think the simplest way to capture this is just to track the money you spend. So, when you spend your "savings" at Christmas, it'll count then, and you can average your spending over the course of the year.

morning owl

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Re: YNAB and saving 50% of my income
« Reply #4 on: July 26, 2015, 11:57:59 AM »
No, I don't think money that you're planning to spend should count as savings in this sense. I think the simplest way to capture this is just to track the money you spend. So, when you spend your "savings" at Christmas, it'll count then, and you can average your spending over the course of the year.

The only problem with that is sometimes planned spending doesn't happen that year. For example if you have an appliance replacement fund, or a home maintenance fund, these things can build up over a long period of time, and be spend once every five or so years.

It's fairly easy to track investment accounts w YNAB, and then divide that by your net income to determine the savings rate.

wordnerd

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Re: YNAB and saving 50% of my income
« Reply #5 on: July 26, 2015, 12:03:00 PM »
No, I don't think money that you're planning to spend should count as savings in this sense. I think the simplest way to capture this is just to track the money you spend. So, when you spend your "savings" at Christmas, it'll count then, and you can average your spending over the course of the year.

The only problem with that is sometimes planned spending doesn't happen that year. For example if you have an appliance replacement fund, or a home maintenance fund, these things can build up over a long period of time, and be spend once every five or so years.

It's fairly easy to track investment accounts w YNAB, and then divide that by your net income to determine the savings rate.

So, it'll raise your average spending in the year it is spent, which in turn will affect your average annual spending. It still seems that, for the purposes of FIRE planning, you should only account for long-term savings.

But in the end, the $5k or whatever in your home maintenance fund isn't going to make or break your choice to FIRE.

morning owl

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Re: YNAB and saving 50% of my income
« Reply #6 on: July 26, 2015, 12:10:04 PM »
No, I don't think money that you're planning to spend should count as savings in this sense. I think the simplest way to capture this is just to track the money you spend. So, when you spend your "savings" at Christmas, it'll count then, and you can average your spending over the course of the year.

The only problem with that is sometimes planned spending doesn't happen that year. For example if you have an appliance replacement fund, or a home maintenance fund, these things can build up over a long period of time, and be spend once every five or so years.

It's fairly easy to track investment accounts w YNAB, and then divide that by your net income to determine the savings rate.

So, it'll raise your average spending in the year it is spent, which in turn will affect your average annual spending. It still seems that, for the purposes of FIRE planning, you should only account for long-term savings.

But in the end, the $5k or whatever in your home maintenance fund isn't going to make or break your choice to FIRE.

True, it's half dozen of one, six of the other. Both methods would work, it just depends on personal preference. But either way, the planned spending isn't counted in the savings rate... In one method, it's counted as spending later than in the other method, that's all.

Le Poisson

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Re: YNAB and saving 50% of my income
« Reply #7 on: July 26, 2015, 12:14:06 PM »
Same thoughts here. We only started down the mustache road about 8 months ago and are still in debt killing phase.

In June we made $8500 (+/-).

We invested $550 in RRSP/RESP
I invested another $200 in my personal TFSA
We diverted $1800 to paying down Lines of Credit
We put $400 extra on the mortgage.

It feels like we're gong backwards because our investments are growing slowly, BUT 35% of our income went to saving/debt killing one way or another. Many would argue that teh mortgage paydown should be invested. I'm not here for that debate right now (marital bliss etc.) but I *think* all of this counts as savings one way or another, so I'm saying we're on the right track, even if we aren't there yet.

RWD

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Re: YNAB and saving 50% of my income
« Reply #8 on: July 26, 2015, 12:42:16 PM »
For the MMM math to work you should typically only count money saved that increases your net worth. If you're trying to estimate your savings rate you might want to exclude money that has been earmarked for a specific future expense. Eventually it will all even out though.

Paying down debt does count toward your savings rate, but you have to keep in mind that MMM's chart assumes you're starting from a net worth of $0. Paying down a mortgage counts too, but you might want to consider it separate from your other calculations as the equity is an investment that only pays for your housing costs. Once your mortgage is paid off your rent is now essentially $0 (not counting insurance/taxes/etc.) so the money tied up in the house is paying your rent for you. It's just not necessarily going to follow the 4% rule (for better or worse).

Joel

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Re: YNAB and saving 50% of my income
« Reply #9 on: July 26, 2015, 12:56:05 PM »
Just an example of why I think savings rates are an overvalued metric. Save as much as you can and who cares if you meet someone else's magic number.

ender

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Re: YNAB and saving 50% of my income
« Reply #10 on: July 26, 2015, 01:05:25 PM »
So for this month, I've tucked away another $100 towards a new car, $50 towards xmas gifts, $50 towards future car repair, etc.

My question: Does this form of savings count as "save 50% of your income"?  In july I brought in $3,500 and spent $2,500.  I didn't put any of that $1000 into my "savings" category - instead it's distributed across numerous "savings towards" categories.

We don't count this. We "spend" every month our car replacement cost putting this into a separate account. It's not counted as savings for us, since it's earmarked for an expense even though it increases our net worth.

Another way to think about it: if you spend $30,000 in December and $0 in January-November, and make $48k ($4k/month) what is your savings rate? If you calculate it at any point in the beginning of the year, it'd be 100%! But in reality you are on pace to spend $30k/year, which makes it less when you look overall.

I was just talking about this with my wife, saying that you really need to calculate savings rate as a rolling 12 or even 24 month average to get a really good feel for your real savings rate.

Quote
I'm not sure if I should count this as savings, though, because it will be spent eventually, right?  On the other hand, i'm not spending it now, which means I'm saving it, right?

For me, the most accurate savings rate is one where I have perfectly amortized and averaged out ALL my inconsistent expenses such as car replacement/etc and put them in exact amounts per month.

What you are doing with car replacement is very smart as it shows you how much your car "costs" every month -- even if you don't write the check that month!

slugline

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Re: YNAB and saving 50% of my income
« Reply #11 on: July 26, 2015, 04:43:52 PM »
The simple answer to your question is "No, not really."

When MMM "saves" he is actually using the money to buy assets that generate income like rental houses and shares of index funds. That's what that 50% he writes about goes towards. Cars and Christmas gifts do not (normally) generate income so this type of saving does not really count toward your stash that funds retirement.

Also look at the posts where he discusses the "4% rule" for more on this subject.

However, you are avoiding interest charges by not incurring debt for the consumption purchases, so you have that going for you.
« Last Edit: July 26, 2015, 04:49:20 PM by slugline »

slugline

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Re: YNAB and saving 50% of my income
« Reply #12 on: July 27, 2015, 07:33:42 AM »
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

Here's a relevant quote from the "Shockingly Simple Math" article:

Quote
Assumptions:

You can earn 5% investment returns after inflation during your saving years
You’ll live off of the  “4% safe withdrawal rate” after retirement, with some flexibility in your spending during recessions.
You want your ‘Stash to last forever, you’ll only be touching the gains, since this income may be sustaining you for seventy years or so. Just think of this assumption as a nice generous Safety Margin.

While you're accumulating money for planned purchases, technically that is short-term savings, until it's spent. But if you want to be on the MMM track, short-term savings habits are barely the start. Not only do you need a big savings rate, but you also need to keep that stash invested for long-term income and growth.