Investment Accounts in the Budget
Currently my investment accounts are all configured as "Tracking" in YNAB —it's money I want to keep an eye on for net worth purposes, but its only real job right now is to grow until I need it many years from now.
My "Budget" accounts, meanwhile, are checking, savings, and cash. On the budget side of things, all of these dollars have jobs in YNAB categories. On the account side of things, I routinely rebalance the majority of these dollars between a checking account that has a very high APY on balances up to $X, and a high-yield savings account with no balance limit on its APY. The idea is to keep the checking account as close to $X a possible at all times to maximize its earnings, and to let the rest of my money earn a smaller APY in the savings account. In both cases, the interest shows up each month as a transaction, and the dollars get assigned to categories wherever they're needed.
This works OK, but I'm sure you all have noticed that "high-yield savings account" is no longer really much of a thing —since the pandemic, that account has gone from earning >2% APY to 0.40% APY, and I have absolutely no expectation that they will ever raise it again. This means that my overflow funds (everything over $X) are no longer really working for me to an economically significant degree.
Because of this, I'm trying to weigh the pros and cons, from a budgeting perspective, of putting those "overflow funds" into a new passive investment account, which I would classify as part of the Budget. It's a bit tricky because the actual value of the account is constantly in flux —its change in value can't be completely represented as a series of transactions, because it's always changing. But here's what I'm thinking:
- Create the account in YNAB.
- Any time I put money into it, that's a transfer transaction —easy enough.
- Any time I take money out of it, that's also a transfer transaction.
- In the budget, I create a category called "Investment P/L" or something along those lines.
- At some regular interval (daily, weekly, monthly, something like that) I check the account balance and reconcile it, letting YNAB create its automatic adjustment transaction so that the account balance is accurate at that moment. That transaction gets categorized as "Investment P/L".
- Money from that category can be moved around YNAB like any other. And of course, if and when it goes negative, that has to be fixed by moving money in from some other category.
In theory, it seems like this system has three risks to it that aren't in my current setup:
- Some of my budget money is at risk of losing value without being spent, because it's not in a bank account anymore.
- It's possible that I could move "Investment P/L" money out into the rest of the budget, spend it, and then later have the investment account lose a bunch more money that I can no longer cover from the rest of the budget. E.g., it makes the budget less trustworthy overall, because I end up spending money I'm not guaranteed to have.
- It's harder to withdraw money from an investment account, so balancing between there and my high-yield checking would take a bit more effort.
But of course the advantage is that I would, most likely, get that overflow money growing again, and at a higher rate than I used to be able to get from high-yield savings.
Has anyone tried this kind of thing?
When investment accounts are on budget, no more than 50% of the money invested in high volatility assets should be comprised of money that is funding your regular budget categories. That's the trick to preserving the safety of your budget while investing the money.
I've had my taxable investments on budget since January 2020. The money in my volatile investments is only about 20% budget category money, which means I could absorb an 80% loss without my budget being put at risk.
Forest Green Viper said:
It's harder to withdraw money from an investment account, so balancing between there and my high-yield checking would take a bit more effort.
I wouldn't be doing a lot of selling as there are tax consequences every time you do. I would just keep cash for the majority of upcoming bills. You're cutting it too tight if you're doing a lot of selling of equities. Buying a new car in the future might be an exception.
I've had the majority of my taxable investment accounts in my budget since 2019. Having an investment category that can absorb losses is key. Like nolesrule said, you should be able to withstand a sizable market correction. I just make a Market Changes balance correction monthly. Sure, it's fun when the market is going up and you have extra funds to categorize but you also have to be prepared for the not so fun months when you take a loss like last last month, for example. March 2020 wasn't too fun either. 😉
Forest Green Viper I've done what you described. My day-to-day account earns almost no interest, so I maintain that at a level to cover the no-fee minimum plus my monthly expenses. I moved all other money that covers true expenses and quality of life goals (category groups) into an "investment account" that actually earns interest.
I chose an income fund with a stable/fixed NAV. This means that the returns can be lower than other investments, but I can treat it like a savings account.
Interestingly, with the launch of Loan Accounts and the Loan Planner feature, I'm seeing where I might want to add a traditional floating NAV investment account to my budget. I have a 20 year mortgage and planned to pay it off in 10 years by putting extra aside. If I put the extra aside into an investment with both growth and income, it is possible to hit my target sooner than 10 years (or miss the 10 year mark, I know, but less likely). This can work for me because over the very long horizon there is likely to be the growth I'm seeking.
For shorter term goals, like holiday spending or annual vacation, or even next year's car replacement, I think the stable/fixed NAV approach would be better.
I haven’t tried such a thing because I don’t think investments are suitable for short term spending decisions and because budgeting money that might disappear defeats, for me, at least one of the reasons for even having a budget: certainty that the money is available safely to spend.
If I felt like I needed to do something like that, I’d keep the investment off budget and only transfer sums certain so that the volatility remains off budget.
Habanero Salsa said:
budgeting money that might disappear defeats, for me, at least one of the reasons for even having a budget: certainty that the money is available safely to spend.
Yes! I was struggling, but you've articulated why I don't include investment funds in my budget.
I might open a second budget to give those investment funds more theoretical jobs, though.