Author Topic: My Short Term Stache, Cash and YNAB  (Read 8241 times)

BigRed

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My Short Term Stache, Cash and YNAB
« on: June 19, 2013, 02:04:21 PM »
I need some advice on how to handle a short term stache without the presence of available springy debt, since we rent and have no HELOC available.

Currently, we're both 37 with 1 kid and 1 on the way, my wife is a full time PhD student.  We currently live in subsidized graduate student housing, which is great.  Our current major goal is to save for a down payment on a house for when my wife graduates in 2 years.  So, a pretty short time horizon.  We use YNAB to organize our finances, but I've come to realize that while YNAB organizes your budget very well, the envelope system results in a very high cash level.  We currently have $50k saved towards the house, an emergency fund of $20k, and between the YNAB buffer and other dedicated savings to handle irregular bills and other anticipated expenses, another nearly $25k in cash.  Obviously, close to $100k in cash (at 0.5%) is absurd.  Our only debt is an $11k car loan at 2% that I justified as "springy debt," to increase our potentially available down payment funds, though leaving them in cash is obviously counter productive.

What say you mustachians to this situation?  How do I apply mustachian emergency fund principles?  And for you MMM/YNAB crossovers, how to mesh the MMM anti-cash philosophy with YNAB's cash-happy orientation?

smalllife

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Re: My Short Term Stache, Cash and YNAB
« Reply #1 on: June 19, 2013, 05:02:04 PM »
Why is your emergency fund so high?  I understand the down payment and buffer (which is what?  You might be higher income than I am envisioning, if you don't mind me asking) but that is a large sum categorized as "emergency". 

What do you qualify as an "emergency"?  Some people call everything from big car repairs and unexpected (aka unplanned) expenses to job loss.  Others (me) call an emergency an extended job loss or medical catastrophe, everything else is planned for.  This will dictate the size of your emergency fund.  Remember that even though it would make YNAB "tight", your buffer can act as a one month job loss fund.  You do have kids, which forces you to be more conservative, but even so $20k is about half the gross median US household income. 

I am a MMM/YNAB crossover so I'll just explain what I do.  I have a 1k car insurance deductible, in cash.  I have a $500 vet bill cushion.  I have a full buffer.  I save up for my biannual insurance, seasonal sports dues, and for my Roth contribution on January 1 (start in June, work my way up).  Between the various categories I have about 5-6k in cash at any time.  My "emergency fund" was transferred to my Roth last year - if I ever have a dire emergency, that is more important than my retirement savings and I will gladly take it out.  Anything less important than my retirement probably isn't an emergency.  My vet, car deductible, and rainy day categories will all be raided if I am unemployed for more than three months (the time it would take to drain my cash, irregardless of whether it already has a job.  I can always build up my rainy day funds later. I also have a reliable part time job where I could increase my hours).  Thus, I avoid having a "job loss/medical catastrophe" fund in YNAB.  I don't have taxable accounts so I keep that money in my Roth, earning me more money to the tune of 9% returns on average.  It is still more cash than I would prefer, but that is my rainy day comfort level. 

Hope that helps!  I asked a similar question a while ago (if I can find the link I'll post it) and this seems to be a topic that no one has a wonderful solution for. 

Alternative that's not for me but you might accept: have an investment account on budget and allocate a part of your emergency fund cash to that.  Your fund would fluctuate but has potential to earn more.  I believe Joel does a variation on this.

BigRed

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Re: My Short Term Stache, Cash and YNAB
« Reply #2 on: June 19, 2013, 05:50:17 PM »
Emergency, in my mind, is job loss.  Car repair and medical have their own rainy day categories funded, at around 1k each.  The EF is high because there was a round of layoffs at my company a year ago and as the newest guy in my department I was worried. 

I don't mind you asking, though I didn't want to get a face-punch for our spending level, since my question here is about what to do with our cash.  Our buffer is just under $8k, which is our current monthly takehome, which I do consider to be an additional emergency fund.  Our actual expenses are somewhat lower than that, and the expenses we'd have in a job loss are even lower, so it adds up to a 4 month emergency fund, plus another 1.5 months from the buffer.  Based on my pre-MMM understanding of the world, that seemed like a good, maybe even inadequate (6 months?  12 months?), emergency fund. 

Keeping investments on budget seems like a record keeping nightmare, but having them off budget loses all of the directed savings power that YNAB gives.  It's probably a moot point, since when the time comes to buy a house, all that money is going to get very fungible very quickly, and category balances are going to be pretty maleable.  So, preserving the category structure may not be so important.





smalllife

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Re: My Short Term Stache, Cash and YNAB
« Reply #3 on: June 19, 2013, 06:06:37 PM »
If your emergency fund is for job loss only and you are okay with investments, updating the account balance once a month is not hard at all (it's what I do for my off budget accounts anyway).  You would be exposing the fund to more risk, but also the opportunity for more growth.  Alternatively, you could invest the money and keep track of it in an off budget account and simply know that it is earmarked for job loss.  It would just be sitting in one category anyway right? 

If you had a HELOC available, would you substitute that for a cash emergency fund?  If so, you can use the down payment fund as a cash cushion in the meantime and feel even better about investing the 20k.   Also, if you are unemployed I would imagine you could cut the spending to bare bones and that 4 month fund turns into 6 or 7 (depending on housing, I could be way off).  Just food for thought.

BigRed

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Re: My Short Term Stache, Cash and YNAB
« Reply #4 on: June 19, 2013, 06:34:49 PM »
First, found the thread you were referring to: http://www.mrmoneymustache.com/forum/ask-a-mustachian/question-for-stache-growing-ynabers/msg37881/#msg37881  I see you raised exactly the same issues, and not a lot of help provided there.

I'm thinking I want to invest my down payment fund, car replacement fund, and some of the various irregular category funds, and leave some amount of emergency fund in cash.  Maybe the vacation fund, too.  Is that risky?  Somewhat.  But doesn't MMM say that "Safety is an expensive Illusion?"  So, there'd be a bunch of categories in there.  I'd know how much went into each one though through YNAB records, so there'd be a way to assign the funds when it came time to use them.  Definitely scares me.  But I'm pretty sure I'm not optimized now.

If you had a HELOC available, would you substitute that for a cash emergency fund?  If so, you can use the down payment fund as a cash cushion in the meantime and feel even better about investing the 20k.   Also, if you are unemployed I would imagine you could cut the spending to bare bones and that 4 month fund turns into 6 or 7 (depending on housing, I could be way off).  Just food for thought.

If I had a HELOC, and I wanted to follow MMM, yes that would be the thing to do.  28k would cover at least 6 months at emergency spending, almost certainly more.

smalllife

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Re: My Short Term Stache, Cash and YNAB
« Reply #5 on: June 19, 2013, 06:55:01 PM »
Personally:

I would keep the down payment fund in cash.  That's too big a goal on too short a time frame to risk on the market.

I would definitely invest the car replacement fund - you can cash flow a beater with no problem if needed.

I don't have a vacation fund but I doubt I would invest it (my idea of a vacation would cost $500 max though, so YMMV . . . )

I would invest all but one month of the emergency fund.  That leaves you with two months (buffer + cash) + any rainy day categories you can raid in cash and the rest growing.

In that situation you would have only car + emergency in the taxable account.  Less to mentally keep track of and easy to tell how much of your stache you are using on a car when it needs to be replaced.

kh

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Re: My Short Term Stache, Cash and YNAB
« Reply #6 on: June 19, 2013, 08:40:09 PM »
I agree that your time frame is a little short for a market investment.  A CD, though, would at least bump your rate a little past that 0.5%.  I've had good luck with Ally - I got a 5 year CD with them, with absolutely no intention of keeping it for 5 years.  The rate is 1.5% right now (still atrocious), but the nice thing is, they only charge your last 2 months of interest to get out before the due date.  Generally, once you keep the account for more than 3-4 months, you're making more in interest (even with the penalty) than you would have with a CD that actually matches the time frame you're looking at.  This blog explains with a nice plot: http://www.mymoneyblog.com/ally-bank-5-year-certificate-of-deposit-a-closer-look.html

Joel

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Re: My Short Term Stache, Cash and YNAB
« Reply #7 on: June 19, 2013, 11:27:41 PM »
I have used YNAB for about 5 1/2 years now. I just recently started viewing the MMM boards, and I would say it is mostly for any additional money saving ideas that I can come up with. For example, the High Deductible Health Care plan I likely would have never pulled the trigger on if it was not for these forums.

Anyways, I will explain how I have YNAB setup, and this method may or may not work for you. I put 10% of my paychecks into my 401k through my work. That is not shown anywhere in YNAB. I save up $5500 per year for my IRA anually. I have a budget category that I build up over each month, and make the contribution each year in January. I plan to buy an engagement ring, pay for a wedding, buy a house, and have kids before I even realistically consider retirement. I'm young! 24. So I'm not stashing every dollar into tax-advantaged retirement accounts, because I will need cash within the next 5 years.

Anyways, I have a credit card that I use for all my purchases and pay it in full every month. The transactions are recorded immediately and come from a category that has a balance. I never overbudget money, or let an overspending stay. Nor do I enter income before it is received. Beyond my credit card, I have two accounts. A checking account, and a brokerage account where I invest in the Vanguard Total Stock Market Index Fund. My checking account earns 0.5% interest on the first 25k balance. I make roughly 50k per year, so 25k in cash would last me a very long time in case of an emergency. Anything beyond that is put into my brokerage account. Notice that I am not tying any categories to accounts. My budget earmarks what my money is for, and my accounts simply store the money, putting it to work for me.

If I ever run too low on cash, I can cash out funds that I may need and potentially take a loss if absolutely required. But 25k should last me awhile. I'm an accountant so I don't foresee any long periods of unemployment in my future.

As far as my budget goes, I have a buffer. It just makes things so much easier. You know what you can budget for the month compared to predicting and estimating. I have several categories that I zero out the category balance at the end of the month (eating out, gasoline, groceries, and "stuff, which is my catch all misc category). Whatever is leftover, goes to my priority for the month.

 I have a few categories that have a maximum limit. I budget $50 per month to each category until they exceed the limit. At the end of the month, I remove any excess funds and put it towards my priority. These categories include at max $500 in golf & exercise, $500 in fun & entertainment, $1000 in gifts, $1000 in medical (which will change as I open an HSA, as well as the cost to replace my iPhone, and the cost for a deposit if I were to move to a new house/apartment.)  If I ever want to do anything, I can. If I get an extra day off and want to get a round of golf in, I will go. If I decide to go watch a Giants or 49ers game, I can go.

The next group of categories is long-term/annual savings goals. I budget a set amount each month knowing that the categories will zero out at some point this year, or in the future. For example, my IRA contribution and insurance/registration categories build up evenly each month but always get disbursed at the end of the year. I have another category for new car replacement, that I have estimated how much I need to save to pay cash for a car when my current car is driven into the ground. I have two other categories that wonít zero out anytime soon, but are for more long term splurges that I would eventually like to make. I have a vacation category that I put approximately $150 per month into, and let the balance build, hopefully taking vacations and not letting it build too much. I have a hot rod category, because quite frankly, I have an old dodge pickup that I have completely restored and rebuilt, and I would love to have a mopar muscle car to go with it in my garage some day. The muscle car would be built for the drag strip, and the pickup is to play in the mud. Of course, I only put $25 per month into this category, but I would like to use it eventually. If I ever need funds, this category will be one of the first on the chopping block.

The very last category is for my future. This includes savings for an engagement ring, wedding, house downpayment, and ultimately early retirement. Currently, I have about 60k total in my budget, with 20k budgeted to the above categories leaving around 40k for my ďFutureĒ. I used to have all these funds in one category, but I have recently split this out. I now have one category that holds 20k for an engagement ring and wedding, and I really hope that this cost is lower, but that is worst case scenario. (Donít give me crap, because I donít care) Any excess goes into the House/Future category. Ideally, I would save up enough to buy a house, and then start funding early retirement, but that wonít happen any time in the near future. So any excess goes into the House/Future category. I currently have a 20k balance in this category. Any dividends are entered as inflows to this category.

At the end of each month, I update my brokerage account balance and record the gain/loss to my House/Future category. It fluctuates every month, but the category balance can absorb any fluctuation that may happen. I run the risk of potentially losing all my house/future savings, but I run the upside of having my money work for me! Itís really not all that much work, but man it is nice to a 10% return in a year compared to a 0.5% return that my checking is getting.
Obviously, if you owned a house or had kids, you may want to have additional categories. But I think the high-level concepts I have structured my budget off of allow me to really flourish. Feel free to ask any questions if anything is not clear.

Sweet Betsy

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Re: My Short Term Stache, Cash and YNAB
« Reply #8 on: June 20, 2013, 06:02:26 AM »
I personally wouldn't invest your emergency fund and down payment... you are too close to needing those funds.  As far as maximizing your interest on those two things...I'd definitely look into i bonds.  You can invest up to $10,000 per year but can't access the cash for the 1st year.  We have part of our emergency fund in i bonds.  I intend to eventually put all but one month's worth of expenses in  i bonds.  We are laddering so that we only have about one month's worth of expenses completely unavailable at a time.  You could also put your extra funds in a cd.  At least you'll earn more than half a percent in interest.   The other 25K that you referenced as being set aside for various upcoming expenses does seem a bit high.  If I were you I'd revisit those balances and see if perhaps you are setting too much aside.  Anything extra I'd put into an index fund at Vanguard and start your taxable savings.  It can be easily accessed if you need it but hopefully can sit untouched for a good long time. 

BigRed

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Re: My Short Term Stache, Cash and YNAB
« Reply #9 on: June 20, 2013, 10:11:53 AM »
Thanks, Joel.  Interesting to see the use of a brokerage account as an on-budget account.  That makes a lot of sense.  Obviously you can cash flow easily on your buffer plus the contents of the rest of your regular short term category balances.  There needs to be some sort of advanced YNAB methods (meaning optimizing your gains over time, not doing crazy shit with credit cards and overdraft to handle taking on more debt) resource.  I mean, other than hoping Joel stops by and answers your question.

I appreciate the responses offering caution on investing the down payment money.  The other side of the coin is that if housing prices continue to rise, then by sitting in cash, I'm losing ground, and then I won't be ready to buy in two years if we stay in SoCal, anyway.  And then it'll be 3 years, 4 years, 5 years, and now my cash has been sitting there for 4 years.  In actuality, this is what has already happenned.  Around 40% of this cash has been sitting there for 5 years already because we thought it'd be 2 years originally, and then we thought another 2 years, and now it's been 5 years, and we've missed huge returns and I'm kicking myself.  There's no guarantee we act in 2 years, it's hugely uncertain depending on my wife's career options after finishing her PhD, whether we decide to stay in SoCal, where renting may be a better choice, and what housing and rental prices do over that time.  So, I'm seeing both the risk that we are not able to act in 2 years when we want to because we lose money in the market and the risk that we decide not to buy in 2 years and continue to miss out on additional market gains, not to mention housing price inflation risk.  Of course, it's possible we might want to act earlier, too.  The future is uncertain. 

Joel

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Re: My Short Term Stache, Cash and YNAB
« Reply #10 on: June 20, 2013, 10:22:36 PM »
Thanks, Joel.  Interesting to see the use of a brokerage account as an on-budget account.  That makes a lot of sense.  Obviously you can cash flow easily on your buffer plus the contents of the rest of your regular short term category balances.  There needs to be some sort of advanced YNAB methods (meaning optimizing your gains over time, not doing crazy shit with credit cards and overdraft to handle taking on more debt) resource.  I mean, other than hoping Joel stops by and answers your question.

I appreciate the responses offering caution on investing the down payment money.  The other side of the coin is that if housing prices continue to rise, then by sitting in cash, I'm losing ground, and then I won't be ready to buy in two years if we stay in SoCal, anyway.  And then it'll be 3 years, 4 years, 5 years, and now my cash has been sitting there for 4 years.  In actuality, this is what has already happenned.  Around 40% of this cash has been sitting there for 5 years already because we thought it'd be 2 years originally, and then we thought another 2 years, and now it's been 5 years, and we've missed huge returns and I'm kicking myself.  There's no guarantee we act in 2 years, it's hugely uncertain depending on my wife's career options after finishing her PhD, whether we decide to stay in SoCal, where renting may be a better choice, and what housing and rental prices do over that time.  So, I'm seeing both the risk that we are not able to act in 2 years when we want to because we lose money in the market and the risk that we decide not to buy in 2 years and continue to miss out on additional market gains, not to mention housing price inflation risk.  Of course, it's possible we might want to act earlier, too.  The future is uncertain.

Check out the YNAB forums for specific questions about how to use the software. Chances are what you think is advanced is being done by several members already. There's plenty of responses like mine on those forums as well. In fact, I have far too many posts over there! lol

Anyways. My vote is to invest excess cash. You have to determine what is considered "excess". Is it anything over 5k? 10k? 20k? 50k? It's your call. What is the most amount of money you would be willing to lose?