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:

  1. Some of my budget money is at risk of losing value without being spent, because it's not in a bank account anymore.
  2. 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.
  3. 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?

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    • nolesrule
    • Stealing From the Future fix is an improvement but is incomplete....
    • nolesrule
    • 1 mth ago
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    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.

    Like 2
  • 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. 😉

    Like 3
  • 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.

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  • 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. 

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 2 wk ago
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      But what you guys are missing is that you need to have a category that can handle the volatility so that it doesn't affect the rest of your budget. Mine is called Freedom Fund. And no, none of the investments are "earmarked"* for short/medium term expenses. 

      It's totally fine, and recommended for most, to keep your investments totally off budget. You two are on the younger side. nolesrule  and I have been at this for a long time. Experts only! 😄

      *Of course in YNAB, no accounts are specified for specific purposes. It's up to you to decide what accounts to use when it's time to pay for something. Nolesrule and I have set ourselves up so that we would never have to sell any equities to make a budgeted purchase.

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      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 2 wk ago
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      Superbone Yes. I’m missing it. Especially when I wrote, “… I’m thinking I’d probably use some kind of ‘decompression’ category that holds a ‘reasonable’ amount of losses…”

      I learned this from a guy who probably knew as much about it as any two people here, so I’m ok with what I know. Even apart from that, I’ve been using YNAB since early 2010, so you’re not that much ahead of me even there  

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    • Superbone I think I'm missing a big enough buffer that I'd feel comfortable, but I can see how it works if you've got that in place! ETA: basically, I think we're saying the same thing.

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 2 wk ago
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      Habanero Salsa It wasn't my intention to insult you. It's not a matter of time. It's a matter of where you are in your financial journey. Best of luck to you.

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      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 2 wk ago
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      Superbone I’m not insulted, I was just taught to be direct. Sometimes to my detriment, I suppose  

      My financial journey is going quite well, but I started almost at the finish line.

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 2 wk ago
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      Habanero Salsa Your father was very well-respected around here. You were fortunate to have such a great mentor.

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      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 2 wk ago
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      Superbone He always told me that I was 25 years ahead of where he was because he’d already done all the stupid things so I didn’t have to. I knew I was lucky but it wasn’t until my bosses started asking me for advice that I realized the extent of it.

      It’s hard leaving the software he taught me, but the principles will work elsewhere. 
       

      I’m sorry my previous posts came across as harshly as they did. It wasn’t my intent, so that’s on me. 

      Like 1
  • 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.

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      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 2 wk ago
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      Marisa I’ve thought about that, too. I’m thinking I’d probably use some kind of “decompression” category that holds a “reasonable” amount of losses so that I could draw that down, and replenish if things get better, without always having to adjust the real job categories. If that makes sense…

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    • Marisa  I think for me, the intention behind this was twofold: first, to replace the nonvolatile interest income I used to be able to earn from high yield savings (no longer really a thing these days); but later, I realized it was _more_ useful as a way to logically assign investment P/L to help fulfill the monthly target amounts on really long-term goal categories.

      For example: for awhile now I’ve had a Wealthfront automated investment account dedicated to funds for a graduation gift for my daughter.  I know how much I want to give, and I know when she’s going to graduate —so setting aside the volatility question for a moment, this is an ideal use case for a category with a dated savings target.  But it’s also quite a few years away, which makes it an ideal opportunity to take advantage of average long-term market growth.  If that money is in a tracking account, it’s harder to use a YNAB target to figure out what (or if) I need to contribute each month, because it has to be based on the sum of the category balance and the tracking account balance, which means manual calculations.  In contrast, if I keep that account on budget, I can periodically reconcile it and then assign the P/L to the category to help meet the target —much easier.  I can also use this strategy across multiple investment accounts and long-term target categories by assigning all of the reconciliation transactions to a holding category (“Investment P/L”) and then use whatever’s in that category at the end of the month to fund those target categories with the right amounts.  Suddenly that P/L has clearly defined jobs, just like my cash assets —and although it sucks to occasionally have to reduce those categories to cover losses, it works out over time because these categories have a long time to correct; my targets automatically change to reflect it, and life goes on.

      i kind of love it so far, but we’ll see!

      Like 1
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 2 wk ago
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      Forest Green Viper Yep, that's the use case. The ability to categorize long term goals. Like my next car purchase for example. Paid cash for the last one a few years ago and I'll have the funds ready to go in the future for the next one. That's most likely 5 to 10 years out.

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