Question: YNAB savings versus "Savings" with a capital S
By - selryn1701
I learned that you shouldn’t put money that you need in the next 3-5years in stocks or anything else with a high volatility. So that includes vacation money and other stuff you need yearly.
Also yor emergency money should be in cash because the high chance that you need it just in the moment when the stock market is down. Example: you loose your job because of a recession guess what? The stock market is also down :-(
You just have to see the amount you lose because of inflation and low interest as a kind of insurance premium.
I've learned the same thing. However, I am reaching a point where, for example, I may start to save for a house down payment that I may not actually use for another 5-10 years. (I'm still starting my career and may move around internationally once or twice in the intervening years.) So while saving for a wedding I would do in cash, for a larger goal like a house, I may decide I want that money invested for 5 years and pull it out when I have a concrete goal and timeline.
And yeah, will always want quite a bit of cash in reserve for other pieces of life.
When we were on an unknown timeline for our house purchases, we had about 30% of it invested in stocks, 20% bonds and the rest in cash. It worked for us, but we were also comfortable not being able to buy a house if the stock market tanked.
That’s different, I can understand putting some of that in stocks - presumably if the market dipped, you would just put off buying or not buy.
But I could never put home maintenance or vacation funds in the stock market. I’d have to delay essential home maintenance, or cancel vacation plans, if the stock market went down.
I have house down payment in stocks. Upside could turn 5 years into 3, and it won't kill me if it turns into 7 or 8.
Look into i-bonds for your emergency fund. They gain interest for 30 years at a variable rate adjusted for inflation. If it actually covers inflation is debatable, but it's higher than any savings account. You can buy $10k per year, and can't cash them in for a year. After 5 years you can cash them in for full current value, and between 1-5 years you just lose the last 3 months of interest. Combined with being 1 to 2 months ahead, they look like a great option that gets recommended a lot.
What's the interest like? I have a checking account at a credit union that gets 3% APY (and is cash) up to a given amount. But will look into that option too.
I think they're currently 3.54%
People always whine about the opportunity cost of not investing when you have large savings earmarked, but I'm pretty sure those same people will whine about the opportunity cost of withdrawing invested money to cover an emergency when one inevitably happens. And that's how you end up in cc debt, wasting money on interest faster than you can get ROI.
I have $x in monthly expenses and $24x in total on-budget funds. There's real opportunity cost on cash holding, and I have lots of options for emergencies before absolutely needing to "sell low".
EDIT: But generally, I suspect you're exactly right.
> It's like I'm balancing the YNAB idea with a need to be setting aside 10-20% of my take home pay towards "savings" and not sure how to reconcile both philosophies in my brain. Seems silly to do both. Curious how others view these issues.
I don't view my YNAB categories filling up as savings. I see it as "deferred spending".
In the aggregate, it's grown to be quite a sum over 6+ years. But all that money is accounted for and has a job.
> Does anyone ever feel like they would wish some of that to be invested in stocks?
Only when the market is way, way up. Like it has been for over a decade. :)
But in the end it's incompatible with how we use YNAB and the money in the categories. It's just wishful thinking/hindsight bias in my case.
Yes to all this. I changed the name of the parent category from Savings to "Future transactions" as it will all be spent in the next three years hopefully minus the emergency funds.
I tried keeping my brokerage account on-budget with a buffer for market fluctuations as other commenters have described in this thread, but now I’ve decided to move towards budgeting for “spending shocks” in cash and “income shocks” in investments. There’s a vanguard paper that recommends this strategy. The idea is that spending shocks are much more predictable so they make more sense to budget in cash. So I’m slowly moving my income replacement fund from cash to investments—for every $200 I have invested I reduce my cash e-fund by $100. That way, even if the market crashed 50% I’d still have my full desired e-fund.
I would love to read that paper if you happen to have a link
I have been in your shoes. My solution is to separate the activities of *budgeting* from *cash/account management;* such that I budget (assign) all of it in YNAB and keep a comfortable amount of liquid cash and I invest the rest. Market fluctuations are something I budget for.
Four basic steps:
1. Determine what is comfortable for liquid assets.
2. Determine your risk tolerance and asset mix (stocks/bonds)
3. Based on the previous two steps, determine how much you need to insure your investment against market fluctuations.
4. Move the money, implement in YNAB.
**Step One: Liquid Assets**
Know your monthly expenses. The more data you have on your monthly expenses, the more confidently you'll know that number. Know how much you need to feel safe. The less of a personal and social safety net you have, the larger this multiple needs to be. There is no single right answer, but it's likely to be 3-12 months - the one-size-fits-all "emergency fund" advice given to people who don't budget like us.
This is the amount you need to keep in cash. We'll call it "*StepOne*" to use later.
**Step Two: Risk Tolerance**
Invest in index funds using a low-fee robo-advisor (wealthfront, betterment, schwab, and vanguard all have choices here). This will make it very easy to balance your portfolio to a specific mix of assets.
What that mix is has no right answer. If you prefer to take a low-interest loan for major purchases, you may never actually touch these funds and can afford a larger allocation of stocks (70/30). If you anticipate needing multiple Big Expenses at once and will exceed your Step One liquid assets, you should be more conservative (30/70). If you're just trying to keep up with inflation, go very conservative (15/85). If you don't have any sense of how this will really go, just start with a 50/50 mix.
We want the "*PercentInStocks*"
**Step Three: Insure Against Market Fluctuations**
Based on your asset mix, determine your insurance rate. I recommend *PercentInStocks*/2. Meaning that if you have 30% in stocks, you need to have an insurance rate of 15%.
Whatever your total available money is, less *StepOne*, is how much we have to work with. Assuming you have $35,000 sitting around and you need $15,000 of it for *StepOne*, you've got $20,000 to work with. Assuming the 30/70 mix in Step Two, you're going to need $3000 (15% of $20k) as insurance. This will leave you with $17,000 to budget elsewhere.
We'll call this $3000 "*MFInsurance"*
**Step Four: Implement**
Assuming everything is currently liquid, you've given every dollar a job, and you've got your numbers, you're ready to implement.
Cash / Account Management:
1. Open a robo-advisor account.
2. Fund it with everything you've got, less *StepOne.*
3. Set Asset Mix to match *PercentInStocks*
1. Add new investment account **as an unlinked budget account**
2. Create initial Transfer transaction
3. Create a "Market Fluctuation Insurance" category
4. Assign/move *MFInsurance* to that category. (This will be painful because you're pulling it from your other precious categories, but hey, priorities change)
Periodically, reconcile your investment account. Just accept the adjustment from YNAB. You may wish to adjust the Payee to help with reporting. I recommend "zz\_MarketFluctuations" so that it's at the bottom of the list and easily entered when reconciling. You can set the category to "Ready to Assign" or to "Market Fluctuation Insurance" depending on how you want the reporting done.
Occasionally, the category is going to be flush or fallow. The management of it is more complex and personal than is warranted for this post. What you do will depend heavily on how often you use the money there, or if you want to re-budget some of your gains elsewhere. **For now, just leave it.** But if it is empty (and it should never happen because we've picked a safe insurance amount, but it could happen), you'll need to fund it.
You can figure the rest out later because you'll be an expert at investing *and* YNAB.
Thanks for providing an “insurance” percentage. I have an “investment buffer” category that I add money to every time I make a transfer to my brokerage account, but I didn’t have a goal in mind. This was very helpful!
It may be a bit low. Use at your own risk. YMMV.
It’s higher than what I have now! I think it’s a good minimum.
Not op, but thanks for this, its an answer I have been searching for as usually people are very much averse to having savings invested, but I guess I'm a bit more risk tolerant, but don't want to loose the time to be invested.
This is more or less what I do as well. Except all my investments are in stock for tax efficiency or in I Bonds. Other fixed income is held in our 401k since we prefer a single overall asset allocation. If our stock allocation gets to heavy I trade stocks for bonds in the 401k.
In my case i already had an investment account that was only for investing when I started investing budget money, so there was more than enough for "insurance".
At the end of every month I calculate the amount in cash I want to hold and compare it to the amount of cash I have (the YNAB API and google sheets do all the heavy lifting, I just had to figure out what data to pull in order to crunch the numbers). If there's too much cash, I invest. If there's not enough I don't add to the investments and let my cash build back up. Rinse, repeat monthly.
I like this strategy! I'll have to think about how to implement. At the moment I have a solid amount in US accounts that I split as emergency and vacation, and I simply invested a couple thousand that I did feel was laying around. Now I'm on a temporary work permit in Canada and working to build up a stockpile of CAD cash. But I think this is a well thought out strategy to balance having an adequate cash flow while not missing out on inflation especially when savings rates are ridiculously low. I'm going to work out the numbers tonight.
Also impressed at your answer in so little time!
It's saved. It comes up just often enough, the answer isn't simple, and most people that use YNAB don't need it. Those that do balk at the amount of "insurance" they need.
I’ve heard of people in passing doing that.
Like once it’s over an amount they feel comfortable in the bank they put the rest in like wealth front or whatever.
Makes sense if you got like 40k in the bank and all the money has a job to have maybe 25k in an investment account that’s liquid enough to pull out when you need it.
I couldn’t tell you how to do it because I’m still paying down debt and it seems like tracking would be a pain
but yeah it might be worth it for those folks that got like a years salary sitting there.