Should bond funds be a Budget or Tracking account?

Hello!

I was wondering how people handle medium term savings such as bond funds. I'd like to start saving for a house down payment, but I don't expect to purchase a house within 5 years.

I was thinking of parking the money in the Vanguard Total Bond Market Index Fund, and I don't feel too bad about converting back to cash if some emergency expense comes up.

I've read that we should give every dollar a job. So I was wondering should I leave this as a Budget account and put those dollars in the "Down Payment" category? Or does it make more sense to log it as an expense into a tracking account, then have a large amount of income the month I make the down payment?

Thanks for your thoughts!

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  • The issue with having it in your budget is the volatility, albeit not very significant with a bond fund... although TBM is down a few percent. You give the dollar a job, and the next day, the dollar may be gone.

    In this case, I'd be inclined to send it off budget, and then bring it back on budget using the same category, so that way you can later ignore it (filter it out) in your reports. "Down Payment Savings" for the category. And then when you actually use it to buy a house, you can assign it to a different category for the actual spending.

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  • Also, depending on your marginal tax bracket, a tax-exempt bond fund might be a better choice, as the interest payments on TBM are taxable as ordinary income. The tax-exempt fund has a lower yield, but you may be left with more money after taxes if your marginal rate is high enough.

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  • I'll go ahead and make it an investment account, and treat contributions in my budget just like any other bill or loan payment.

    I was reading about tax-exempt bonds yesterday too. I still have more to learn about them before knowing when the tax advantages outweigh the lower yield!

    Thanks for the reply!

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 3 yrs ago
      • Reported - view

      Garth Look up "Tax Equivalent Yield". It's math for comparing taxable and tax-exempt yields. Essentially you divide the yield of the tax exempt fund by 1 - total tax rate on an equivalently taxable fund, and it tells you what a taxable fund yield would have to be for th two to be equivalent in after tax return.

      You can also do the reverse with a taxable fund to determine the after-tax yield.

      For example, let's say you have a taxable fund returning 2.5% and the tax exempt fund returning 2%, and you are would pay 24% ordinary income rates on the taxable fund. The TEY on the tax-exempt fund would be 2% / (1 - 24%) = 2.63%. Since the taxable fund is at 2.5%, the tax-exempt fund is better. For after tax comparison, it would be  the taxable fund's 2.5% * (1 - 24%) = 1.9%.

      The math gets a little more detailed if there are state taxes and the availability of tax-exempt funds specific to your state, and/or also if you are in an income range for the Net Investment Income Tax, which is an extra 3.8% federal tax on investment income (which includes bank account interest).

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  • Garth,  I'm looking to do something similar to save for a new vehicle purchase.  Are you happy with the way you decided to keep track of this "savings" account?  Or did you change the way you're tracking it?

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 2 yrs ago
      • Reported - view

      Maroon Snow I'm not Garth, but I am actually investing my car fund money in stocks (as all of our taxable money is invested), not bonds and maintaining an overall portfolio allocation of 75% stock / 25% bonds. Of course, we have a large enough taxable account that we could afford to still by the car during a downturn (and would adjust tax-advantaged accounts to maintain our asset allocation).

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      • Maroon_Snow.3
      • 2 yrs ago
      • Reported - view

      nolesrule , thank you.  I think you are probably the person I'm looking for.  It sounds like you may understand where I'm coming from.  I'm new to YNAB, but I'm NOT living paycheck to paycheck.  My only debt is my mortgage, and I could write a "check" to pay it off, but prefer to have that money in equities, rather than pay off my mortgage.  So, again, thank you.    Please note, I'm not asking about investment strategy...I'm happy with where I'm at.  My question is about YNAB.  I have all of my accounts linked to YNAB, and I've manually entered my assets so that I can track net worth.  I have a taxable brokerage account with Vanguard where we stash money after we've maxed out our 401k, IRA's, HSA's, etc.  I want to be able to "earmark" a portion of that Brokerage account, for a vehicle purchase.  I know you told Garth to do this outside of YNAB, but I'm trying to do everything inside of YNAB.  Any ideas for how to do this?  OR, do you have alternative software that would be better at keeping track of this? Thank you.

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    • Maroon Snow I'm not nolesrule , but I just created a bond fund that I'm keeping on-budget. I plan to reconcile it once a month, either adding to or removing from the categories that I'm saving for. That way I don't have to deal with daily fluctuations, but I still keep a general idea of what's going on with that money.

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      • Maroon_Snow.3
      • 2 yrs ago
      • Reported - view

      slightlysmall , thank you.  This sounds like a good idea.  So you're saying it's NOT a linked account, correct?  You need to manually adjust the balance?  I think it's making sense.  So, for instance, 20% of the total value may be for a new vehicle.  So you would multiply the total value by 0.2 in order to determine how much you have in your "new Vehicle" category?  I think I understand the concept, but it would be helpful if you could show me an image or something to clarify how you're keeping track.  Thank you for your help.

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    • Maroon Snow That's exactly right. I tried linking it, but dealing with the daily adjustments was a pain, so I noped that within like three days. And yes, if you intend for 20% of the fund to go toward a new car, I'd multiply any new funds (or any losses) by .2 to determine what goes to that category. And don't forget to allocate the other 80%!

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 2 yrs ago
      • Reported - view

      Maroon Snow I use some Vanguard money market funds for savings money (better rate than a savings account) and opened a second brokerage account for them that is part of my budget. The long term taxable investments are in a separate off-budget account.

      For both accounts I just update their values with a reconciliation at the end of the month. A bond fund can be a bit volatile, but not hugely volatile that you would need to update the balance and account for it in your budget daily.

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      • Maroon_Snow.3
      • 2 yrs ago
      • Reported - view

      slightlysmall   Thank you.  I think I understand what you (and nolesrule) are suggesting.  I think my last set of questions are as follows 1.  "on-budget" means that it's a budget account, rather than a tracking account, right?  This allows you to budget the dollars from that account.  2. "Off-budget" means tracking account?  I think once I know these answers, I'll take some time to experiment and let you know how I make out.  Thank you very much for your help.

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      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
      • 2 yrs ago
      • Reported - view

      Maroon Snow 

      One more guy who isn't who you addressed, chiming in.  There are two important distinctions you are asking about.

      1.  On-budget vs. off-budget:  An account that is on-budget is part of your YNAB Budget Universe.  The dollars in the account have jobs, and if the account fluctuates in value (e.g., an investment account) you need to adjust categories up or down when the account goes up or down in value.  IMO, there is not enough value in doing this to keep an account that will fluctuate frequently on-budget.

      2.  "Tracking Account" means an account that you keep in YNAB that is off-budget.  Note that you are not obligated to track any off-budget accounts in YNAB at all; you would only do so if you get some value from being able to see the off-budget account in the same program as in your budget.

      In my case, I don't keep my investment accounts in YNAB at all.  It's not worth my effort to update them in YNAB, when I can have Quicken update them daily for market changes.

      From a system design perspective, keeping an account off-budget (whether it is a tracking account in YNAB or simply not an account in YNAB) means that whatever you do to track that account or assign purpose to it is external to the budget.  For an off-budget investment account used to save for some long term goal (car purchase, kids' college, retirement, whatever) any flows from an on-budget account to the off-budget account look like expenses to the budget.  Any flows from the investment account to an on-budget account look like income to the budget (unless you make it a contra-expense.) 

      Example:  When I was working, I had a category named "Roth IRA."  I budgeted money to that category through the year, then in early January I would "spend" the money by making my annual Roth IRA contribution.  In retirement, the flow is reversed; I take draws from investment accounts to checking, and this appears as income to the budget.

      Saving for a car would be about the same thing.  Money flowing from your on-budget checking account to the investment account would be a budget expense.  It could be "investment expense" or "future car" or whatever makes sense to you.  Then when you buy the car, either the money flows through the budget with a category coming in from the investment account and a category when spent on the car; or you write a check directly from the investment account for the car, and the car purchase never appears in your budget at all.

      You organize it whatever way makes sense to you for the situation you have.

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      • Maroon_Snow.3
      • 2 yrs ago
      • Reported - view

      Patzer  thank you.  This is VERY helpful.  You've really explained it well.  I appreciate it.  I do have one more questions for you.  I'm relatively new to formal budgeting.  My wife and I have always done a good job of living well within our means, but we're just starting to take a formal approach to budgeting.  You mentioned Quicken.  What do you use quicken for?  Maybe that's something we should be doing in addition to YNAB?  Thank you.

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      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
      • 2 yrs ago
      • Reported - view

      Maroon Snow I have used Quicken since 1993 or so, originally to track spending.  Now I use it mostly to track investments and net worth.  If I could break off the cash management accounts in Quicken and apply a zero based allocation budget to them (i.e., make a subset of Quicken accounts act like YNAB) it would be perfect as a stand alone financial app.  Unfortunately, Quicken really sucks at budgeting.

      YNAB excels at doing an allocation budget, but has weak reports and sucks at tracking investments.  So I use both programs.  Many users who found YNAB before using Quicken don't find the value added by Quicken to be worth the learning curve and cost.

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  • Perfect, thank you.

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