No. of Recommendations: 2
In general, the more categories you have the more money it looks like you have to save up. In tension with this, having fewer categories runs the risk of letting you overlook things or double count savings, until Something Bad happens. Envelope budgeting is a dance between eating beans and rice because you don't have enough saved for everything on your wish list, and not having funds to pay for car repairs because you put all "repairs" together and needed to fix both the car and the barn.

I've been using YNAB for about 9 months now and I've struggled with this. What has ended up working best for me is something like this:

1. Each month I set up budgets amounts for what I think the expense will be that month. I found that -- for me -- saving up money in categories to carry over just didn't work well.

2. Throughout the month if some category is going to significantly more or less than what I projected I go in and rebalance. If I increase one category by $100, though, I have to find something else to cut by $100. I want my overall number for the month to be close to zero.

3. I budget some amount to irregular expenses. That money does carry over from month to month. So if I suddenly have to have some expense that I can't cover from the adjusting above then I cover it from the irregular expense category. I determined the amount of that category by adding up all the irregular expenses and the contingent expenses and then applying a likelihood factor to them. That is, some irregular expenses are irregular but 100% likely (real estate taxes for example). On the other hand, some expenses may not occur during that year or the amount may vary widely (auto repairs). Now, it is possible that every contingent might hit in a maximum amount, but not really likely. So, I do the irregular expense fund to cover that.

4. In our case we still have some debt to pay off. I have a minimum snowball amount I budget at the beginning of the month. If we have a good month and there is extra money available to budget then I throw the extra to the snowball for that month only. (And, btw, for the first time in about, umm, 15 years our credit card debt is now just under $20,000!).

The above is a bit idiosyncratic but it does seem to work for us.
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