Loan interest

Hi I was just wonder if u could help. I’ve got a loan as a tracking account I did my t/f today of the full balance of the repayment to the tracking ac from my current account. But how do I account for the interest? I can do an outflow from my tracking account to the interest category but then it’s leaving it that I’ve not budgeted to interest. If I budget the amount of interest it’s not correct either as it’s already gone out of my current account in the repayment? 

Thankd

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  • I have a car loan. I keep the principal balance in a tracking account. 

     

    When I make my car payment from my on budget account, I enter it as a split transaction, either two or three splits. 

     

    The first split is the amount of principal paid, which is a transfer to the tracking account and gets categorized as "auto loan"

     

    The 2nd split is the amount of interest paid which gets categorized as "auto loan interest" and is a regular budget line expense, not a transfer. 

     

    The possible 3rd split line is if I make any extra payments to principal, which is also a transfer to the tracking account, categorized as "auto loan" with a memo of "extra principal". You could add this in the first split line and only have two, I just like to see it broken out. 

     

    Every month, I budget separate amounts for "auto loan" and "auto loan interest". 

     

    Hope this helps!

    Like 4
    • KD603NH Hi, I had the same question and this seems to fix the issue for regular loans. Thanks! But it seems to only work for tracked loans and not for Credit Cards because it just says "category not needed" and you can't split up the category. How do you deal with credit card interest?

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    • Coral Mixer credit card interest is recorded as any other transaction. (You're buying time.) Budget to an Interest category and categorize as such. (By default, there is an Interest and Fees category, but you can create one if you've deleted that.)

      The payment reduces debt, regardless of how it got there (purchase, interest, cash advance, whatever).

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    • dakinemaui This is my first month and I guess I'm still confused... 

      So, when the credit card bill comes around and you pay it, it comes out of your credit card payment category (as a transfer from checking to credit card) with "no category needed" so you can't change the category.

      Do you then make a separate payment to the credit card for the interest so that it will come out of your "Interest and Fees" category?  And if so, wouldn't it just automatically change to a "transfer" with "no category needed" just like a regular payment does?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 mth ago
      • Reported - view

      Coral Mixer The credit card interest doesn't come out of the payment. It is a line item on your statement, so it is its own charge like any other purchase.

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      • KD603NH
      • KD603NH
      • 1 mth ago
      • Reported - view

      Coral Mixer you have to add an interest "purchase" in your credit card account - so just like you would add groceries as a transaction you would add interest with the payee being the credit card company and the category being interest and fees. This way your CC balance in YNAB will reconcile to your statement.

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      • dakinemaui
      • dakinemaui
      • 1 mth ago
      • 1
      • Reported - view
      Coral Mixer said:
      Do you then make a separate payment to the credit card for the interest

      No. You wouldn't make a separate payment when you buy a shirt or dinner, would you? Stuff you buy with a CC -- including additional time before you have to pay them back -- are recorded as transactions in the CC account categorized according to what you bought (groceries, clothing, interest, etc.)

      https://docs.youneedabudget.com/article/140-credit-card-interest

      Like 1
    • KD603NH OK, forgive me for asking so many questions (feel free to role eyes as necessary)....

      I got that you make a category called interest and fees in the budget. I got that you add a transaction in the credit card account for the amount of the interest.

      But after doing that, my budget tells me that I've overspent my interest and fees category. I've already made the payment to card which came out of my credit card payment category only. The payment included the principal AND interest.

      If I budget money for the interest and fees category to cover the "overspending", my budget reserves this money so that it can't be spent elsewhere. Yet it won't ever be spent because the interest was already covered with the payment.  So then I tried to subtract the amount budgeted for the payment by the same amount but I was in the same "overspending" boat.

      I don't understand why I can't split the categories for the payment to cover principal and interest.  Seems easier to just make an reconciliation adjustment every month and put "interest" the memo instead of making a separate category.

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      • KD603NH
      • KD603NH
      • 1 mth ago
      • 1
      • Reported - view

      Coral Mixer let's make this super simple. Let's say you spent $50 on your card total on your last statement, that was a single charge at the grocery store that was budgeted for in your groceries category. But, you have prior spending of $100 that hasn't been paid off that you are paying interest on and the amount of interest charged was $5. The total of your last statement would be $155. $100 of your previous balance + $50 of new spending + $5 interest. If you didn't enter the interest as a transaction in your credit card account in YNAB and categorize it as interest, your YNAB cc account balance would only be $150 and it wouldn't match your statement.

      I would focus on getting all your transactions reconciled so your CC account in YNAB matches the balance on your credit card statement. Then, it's just one payment to the card.

      Like 1
  •   This worked perfect thanks

    Like 1
  • Coral Mixer said:
    The payment included the principal AND interest

    The distinction of principal and interest is a needless complication -- it's all lumped into "debt". Say on Dec. 20, your statement closes. In addition to all your other purchases, it lists "interest" for $whatever, yielding a combined total balance of $X. The fact $X came from groceries, airline tickets, interest, or whatever no longer matters. Nearly a month later, on Jan 17 your payment is due, which just reduces the account balance.

    You're overcomplicating things trying to split your CC Payment. An interest expense is no different than any other purchase.

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    • dakinemaui I agree. I think I'll just keep things uncomplicated and get rid of the separate "interest and fees" category altogether and just make adjustments for the monthly changing balances.  

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      • dakinemaui
      • dakinemaui
      • 1 mth ago
      • 1
      • Reported - view

      Coral Mixer Those adjustments will have to be categorized. 😉  (By default, they get the category To Be Budgeted.)

      By using TBB you won't have to budget to an Interest category, but that's not really a simplification. In order to not sink deeper in debt, you'll have to budget $X toward the CC Payment category (where $X is the amount of interest). Therefore, the drawback to using TBB for interest/adjustments is that it's harder to see if you are losing or gaining ground.

      Contrast that to using an interest category where ANY yellow means you're sinking deeper and ANYTHING budgeted toward the CC Payment category means progress (assuming no yellow). This is far more obvious.

      Like 1
  • Coral Mixer said:
    I don't understand why I can't split the categories for the payment to cover principal and interest.

     Because the interest was incurred nearly a month prior and there should already be an outflow transaction for that amount in the CC account. Your CC balance increased accordingly at that point. Splitting your payment would double-count that amount.

    Again, think of it this way: Interest == More Time To Pay The Piper.  Feel free to rename the category if it helps. You buy groceries, you buy time, you buy an iPad, you buy whatever. They are ALL handled identically, and you should have money available in the category prior to the outflow.

    Like 1
  • Coral Mixer said:
    If I budget money for the interest and fees category to cover the "overspending", my budget reserves this money so that it can't be spent elsewhere. Yet it won't ever be spent because the interest was already covered with the payment.

    Ah, I think I see part of your confusion. Yes, budgeting for that interest reserves money so it can't be spent elsewhere. However, your payment covered the interest from the previous statement. That budgeting will reserve money that you'll use for your NEXT payment.

    Like 1
  • Coral Mixer said:
    I agree. I think I'll just keep things uncomplicated and get rid of the separate "interest and fees" category altogether

    To be clear, I was trying to get you to ignore the distinction of interest for your payment. I'd suggest you keep that distinction when interest was incurred; i.e., with an outflow transaction categorized to Interest dated the same day as your statement closed.

    Like 1
  • OK, I just took a workshop and I think I understand now.  I did have to reduce the amount budgeted for my payment by the amount of the interest to equal the total amount already paid.

    I was able to understand by clicking on the "activity" amount by the credit card payment which showed me a breakdown of where the dollar amount came from (interest charged + purchases - payment amount = activity amount).

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  • Coral Mixer said:
    I did have to reduce the amount budgeted for my payment by the amount of the interest to equal the total amount already paid.

    You didn't actually have to. Again, the money entering the Payment category from interest is for your NEXT payment. Moving that money obviously lets you do something else with those dollars, so it's your call if that something is more important to you than paying down debt.

    In other words, you chose to move those funds to something more important. Hopefully. 😉 This is exactly the kind of trade/comparison YNAB wants you to make.

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