Temporarily Holding Funds in a Line of Credit

Hi everyone,

I've searched for information on this topic, but most of the scenarios I've found are pretty specific so I thought I'd just ask here. I think I already know the answer to this question though, but let's see if the community has any ideas. :)

I have a Line of Credit (budget account) with a balance of e.g. -$15,000, where I record two transactions each month... a payment into the line of credit (paying down my debt) and the monthly interest which is applied to the account. My payment comes directly from my chequing account (so it's a transfer), and the interest is applied to a category called Loan Interest which I budget for each month (combined with interest from other debt accounts).

I have a large sum sitting in my chequing account which essentially accounts for my budget balances for both short-term and long-term spending. For example, my rainy day fund, my annual municipal taxes, my auto repairs fund, etc...

Rather than have this sizable amount of cash sitting in my chequing account, I would like to transfer it to my LOC to reduce my interest payments. I stand to save about $70/month, and I won't need that full sum of cash for some time... hopefully, never, for some of it.

No matter how I try to set this up, I can't seem to make my budget look right with the transfer. If I move the money (let's just say it's $15K), my LOC budget category goes to -$15K, and my To Be Budgeted drops by an equivalent amount. I know WHY this happens with YNAB, but I don't consider that money to be SPENT on something. The money still has a job, it's just sitting in a different physical location, which also happens to be an account in YNAB.

I've tried creating the LOC as a tracking account, but then the interest isn't tracked in the budget. I've tried creating it as a cash account, but then the starting balance (negative) affects my budget by reducing my funds in To Be Budgeted.

The only way I can see this working is as follows: create a cash account called something like "Holding" or "Temporary"; transfer the funds from chequing into Holding; create an inflow into my LOC for the same amount and categorize it as TBB.

Is this the best way to do this? Your thoughts are much appreciated.

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  • There is a very real danger the bank will convert this to a normal loan with no redraw facility. (It's happened to others.) Obviously, that would leave you in a world of hurt.

    The unfortunate truth is the interest saved in the end is usually not significant enough to justify the additional infrastructure and complexity required. The time to becoming debt free is overwhelmingly determined by principal reduction, not by saving relatively few dollars in interest. It might shorten the time to payoff by a month or two out of a couple years, a decrease likely to be well under 10%.

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      • dakinemaui
      • dakinemaui
      • 7 mths ago
      • Reported - view

      I will say, however, that I'm a fan of letting people make their own choices. I'll followup with what I would do in such a scenario to make the bookkeeping fairly easy.

      If you regard these instructions as "difficult", I'd strongly urge you to pursue a different path.

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      • Beige Koala
      • Beige_Koala.2
      • 7 mths ago
      • 1
      • Reported - view

      dakinemaui Hey there, thanks so much for your reply. Your point about the bank possibly converting this to a normal loan is something I hadn't considered. I've had this LOC for over a decade and they've been very happy letting me pay interest from time to time, but you're right that I wouldn't want to get caught with my pants down. I'll keep my cash in a high interest savings account for now.

      As for your comments about becoming debt-free, I'm in full agreement with you. Personally, the only debt I'm holding is secured against my primary residence, and I'm very happy paying that down at a regular interval until it's time to renew my mortgage.

      Thanks again!

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  • YNAB works really hard to separate cash from credit in the budget, and you fundamentally want to blur that line. Definitely not something Support will condone. Still, if you want to park budget funds in a LOC, you'll need the LOC to be an on-budget CHECKING account to allow it to participate in budget interaction. I'm assuming you don't want to empty your various categories by reallocating to debt reduction!

    WARNING: you do run the risk you cannot redraw from your LOC if the bank converts it to a normal loan (repayment only). Your various savings would then be irretrievably tied up.

    Also be aware you have to manage cash-flow yourself. Meaning, if you're going to write a check or pay a bill from your checking account, you'll have to ensure sufficient funds are present (i.e., transfer from the LOC). If you don't completely understand the location/purpose independence principle, do NOT do this.

    If you're still game, you'll need two on-budget accounts: one for the LOC and one to track the real debt (excluding your savings amounts). Do NOT use a LOC account type, these must be checking or cash account types to deactivate the built-in debt-handling. The LOC account will have the accurate (negative) account balance, allowing import, reconciliation, whatever. The real debt account will have a positive balance. Initially, these are the same value with opposite signs. After your transfer of the savings-related amount, the LOC account will be closer to $0 (i.e., the point of all of this).

    Setup:

    1. Create two new accounts with $0 balance each.
    2. In the new LOC account, make a transfer to the real debt account for the current working balance.
    3. Create a category "LOC Debt Reduction" to plan for real debt reduction.

    Your LOC payments -- those intended to reduce the real debt -- need to update several things: a) the reduction of your checking balance, b) the increase in the LOC account balance, c) the reduction of the debt account, d) the reduction of the debt category, EDIT: and e) increase of the existing LOC Tracking account. This is easily recorded as a split transaction. Enter it like this in your checking account:

    • Net (top line): outflow of $X (goal a)
    • Split 1: outflow of $X categorized against "Debt Reduction" (goal d) <EDIT> with a split Payee of Transfer to the LOC Tracking account.
    • Split 2: transfer outflow of $X to the LOC account (goal b)
    • Split 3: transfer inflow of $X from the real-debt account (goal c)

    Or you can enter things in the debt-tracking account instead if that makes more sense to you:

    • Net (top line): outflow of $X (goal c)
    • Split 1: outflow of $X categorized against "Debt Reduction" (goal d) <EDIT> with a split Payee of Transfer to the LOC Tracking account.
    • Split 2: transfer outflow of $X to the LOC account (goal b)
    • Split 3: transfer inflow of $X from your checking account (goal a)

    Your transfers of normal budget funds into the LOC (funds to be parked) are recorded as just that. They do not impact the debt account, but simply raise the LOC balance toward $0.

    I suggest you try this out in a test budget until you get comfortable with the mechanics.

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