Renovation Debt on LOC - Use cash from budget balances first
I am a long-time YNAB user, including nYNAB since it came out. I am doing a large house renovation, and will be using my LOC to pay for it. Once the renovation is complete, I will be taking out a mortgage so I can pay off the renovation over time (I don't have a mortgage now). I am doing this deliberately, as I feel I am better off paying slowly for the renovation with low interest debt, and adding to my investments sooner which results in higher returns than paying my mortgage.
My question is around the cash balance I have in my chequing account (from budget balances). This money is currently making me essentially no interest, and I would rather use this cash first before taking money out of my LOC as I will starting being charged interest immediately. How can I account for this in YNAB without messing up my account balances?
So far, I have paid the first renovation payment to the contractor using a cheque from my chequing account (I had enough cash in the account to cover the payment). I assigned this transaction to my 'Renovation' budget category, so it correctly showed up as negative activity in that budget category, but I have not budgeted any money towards the category, so it has a negative balance equal to the amount of the payment. That is fine for that month, but I ran into problems when my budget switched to the next month. Because the payment came out of my chequing account, it reduces my TBB amount and categorizes the payment as overspending in the previous month.
I know that YNAB isn't supposed to care where your money is located, that is why you use budget balances, not account balances, but that doesn't seem to apply to debt. I understand that I can just take the renovation payment from my LOC now, but that seems very inefficient. My problem is that I deliberately am taking on debt for a specific purpose, but would like to optimize and minimize my interest costs overall by using my cash first.
That was very long-winded, but I appreciate any suggestions!
Hey ghatko !
I must admit, this took me quite a while to wrap my head around (and that's being generous! 😆).
You're right, YNAB does want you to use categories as money holders, instead of accounts, but that mostly applies to checking/savings accounts. In this case (and for other debt accounts), the accounts themselves do play a very important role.
Now, since you paid that first renovation payment out of your checking account, you want your budget to reflect that reality (which you did, by adding that transaction in your checking account). However, because that payment wasn't budgeted for, the cash overspending will affect your budget going forward, so you can't trust the amounts in the rest of your available balances!
Because this payment came from your checking, you'll need to cover that overspending now, either by going back to last month and moving money from other categories to cover the red, or you can reimburse yourself from your LOC.
Let me know how it goes, and what you decide! (and if I got it right! 😉)Reply