YNAB You Need A Budget

[sequoiawoman]

I'm evaluating YNAB to see if it can manage our recently inherited rental income. I like the budgeting feature because we have huge expenditures that we need to budget for: semiannual property taxes, quarterly estimated taxes, and repairs that can be $0 for several months, then suddenly several thousand in one month. We have average monthly figures for these expenditures, based on tax data. We're hoping YNAB can help us keep track of these figures, so we don't think, wow, look at all this income--let's take a trip!! and then get blindsided by a big bill that we should have expected.

So, I'd like to run my setup by the forum. I've input one month's data, and tried to set up my budget categories, but I'm not totally sure what I'm looking at.

I started with TLBauer's excellent post on "income from several sources". He suggests making budget categories for each income source; entering income as an inflow (ex. $1000), then marking the "budget" amount as a negative (-$1000) to balance the income. That's where I get a little fuzzy but thought I'd take it on faith.

I set up one master category for each building, subcategories to match the standard U.S. Schedule E Rental Property tax form.

For example, a master category called "Oak" for the Oak Street rental, which includes 4 units. Under it, I have:
ori - Oak Rental Income
oad - Oak Advertising
oauto - Oak Auto and travel expense
ocl - Oak Cleaning and maintenance
ocm - Oak Commissions
oins - Oak Insurance

etc. I use the abbreviations to get to the right category quickly when entering transactions. I have a lot of categories: five buildings each with their own set, plus our personal monthly bills and expenses, rainy day funds (which are for personal surprises, not the business ones).

In each category, I budget the average monthly expense. I'm hoping to keep those amounts running forward, accumulating until they're needed. For example, the budget for repairs for one building is $500, and every three months I might spend $1500.

Question 1: As I'm starting, I'm in the red on some categories, as those huge expenses happen to have hit this month. I budgeted $500, I spent $1500. Do I ignore this, and just soldier on with budgeting $500 for next month? If I do, though, will I end up underbudgeting for the year?

A transaction for entering rental income might be:

Deposit Split Categories $2700 total inflow
(subtransaction) oinc - Oak income (memo=Apt A) $1500 inflow
(subtransaction) oinc - Oak income (memo=Apt B) $1500 inflow
(subtransaction) ocm - Oak commission $300 outflow -- because that gets taken out before we get the check

Seems pretty elegant! I expect to easily get tax data from this at the end of the year by running a YTD report.

Next, I go to the budget category Oak Income, and enter -$3000 to balance the income. Because I have faith in TLBauer even though I've never met him.

When I close the categories up, I can see the summaries. This is cool. I wish I knew what I was looking at. For example, one building (using fictional numbers) is:

Oak Budgeted= -2200 (which I think means we budget to clear 2200/month)
Actual = +5200 (what we actually netted this month)
Balance = +2000 (what we're stashing for the big bills coming down the pike)

Question: Looking at just this building, we can budget +3200 of this for our personal bills and rainy day funds, right? I'm worried that I'll start looking at that +5200 amount instead.

And then I have another, problem building:

Walnut Budgeted= -1000 (on average, we have 1000 more income than budgeted expenses)
Actual= +120 (what we netted this month)
Balance= -880 RED!!

So, I've netted $120 for the month, but down the line I need to make up the 880 that I should have saved for upcoming bills.

Question: what the heck do I do? I have the 3200 "extra" from the other building -- how do I apply this against the 880 before I get excited and spend it on groceries? Do I apply it next month, or this month??

Question: Can I trust the "Available to Budget" amount on the header? Do I use that to clear out all the red categories? I still have some money in it, but I think I have more red than black, if you know what I mean.

Question: In re-allocating funds and changing budgeted amounts, how do I keep track of those golden averages that I need to make sure I cover every month?

My apologies for the horrendously long post. I just really, really want this to work for us. We need the accounting features of regular bookkeeping software, but I SO want the budgeting features of YNAB that I wouldn't mind having to do a few convolutions if it can work for us.

Many thanks!

[Joel]

This may or may not answer your questions, however, I wanted to mention something as far as establishing averages.

I would look at each bill seperately.

If it is due in 12 months, then you can divide the total amount by 12 months and average that amount monthly.

If it is an annual bill, that is due before 12 months. Then you need to budget more for it now. For example, if you have an annual bill that is due in 8 months, you need to divide the total by 8, and budget a higher amount then the 12-month average. After you pay the first bill, you can reduce the budget amount back down to 12 months. I would do this for each bill.

This way you can avoid having a bunch of frontloaded bills and having a huge overage.

Another thought: consolidating categories.

Also, for the Income... based on the ynab4 reports. I would likely just clearly identify my Payees in a way that identifies with each property. It's not necessary to have a category for each rental's income, and negative budget. (At least, I dont think it is - you can see payee totals for each one individually if you need to) Less categories = a simpler budget.

I'm not even sure that I would have a seperate master category for each rental property. Could you just have one master category for rentals, and then identify each different line item. Do you actually need a master category for each individual rental? You can use the Payee and Memo fields in order to add any identifying information that you may need. You can then customize any search in the all accounts view that you may want.

This are just things I might personally do, and may or may not work for you. I think overall you are doing very well, and it sounds like you got it figured out. However, the suggestion about budgeting more now to make up for the annual averages, I highly recommend doing. You could very easily overdraft your account. Alternatively, you could keep the overages in those categories, but I prefer to stay conservative.

[YYC27]

I would look at each bill seperately.

If it is due in 12 months, then you can divide the total amount by 12 months and average that amount monthly.

If it is an annual bill, that is due before 12 months. Then you need to budget more for it now. For example, if you have an annual bill that is due in 8 months, you need to divide the total by 8, and budget a higher amount then the 12-month average. After you pay the first bill, you can reduce the budget amount back down to 12 months. I would do this for each bill.

Alternately, if you have available funds built up already .. if you have an annual bill due in 8 months, budget 4 months worth (in this case, 1/3 the annual) now and continue with 1/12 going forward. Depends on where you are, though. Either way, you want to have the funds budgeted before the bill arrives.

[gntanl]

I only have the one rental property bringing in anything at the moment but the following is what I would do.

Question 1: As I'm starting, I'm in the red on some categories, as those huge expenses happen to have hit this month. I budgeted $500, I spent $1500. Do I ignore this, and just soldier on with budgeting $500 for next month? If I do, though, will I end up underbudgeting for the year?

If you have the funds, I would budget to these categories to zero. Then starting from next month the budgeted amounts will start building up to be ready for the next time expenses come around. If there is more money in the category than you think is required at the end of the year, then you can always negative budget to the category to reduce the available amount and free the money up for elsewhere in the budget.

Question: Looking at just this building, we can budget +3200 of this for our personal bills and rainy day funds, right? I'm worried that I'll start looking at that +5200 amount instead.
....

Question: what the heck do I do? I have the 3200 "extra" from the other building -- how do I apply this against the 880 before I get excited and spend it on groceries? Do I apply it next month, or this month??

What is happening is that when you are recording the income against the Oak Income category, the budget is thinking that you have allocated that money to the Income category to use for other expense transactions to be recorded against the income category. because recording the actual expenses against the income category doesn't give a clear picture of what was income, vs expense, you negative budget the income amount, making it available to be added to any other category budget amount.
This means that after budgeting expenses for Oak, the balance could be added to your Walnut property budget categories if needed to make up for extra expenses. If there are no other property expenses to budget for, then the leftovers could be used for personal expenses. Of course it is up to you where you add. You have to be able to cover your personal expenses too and these might be more important than the rental expenses to you.

For example
Category Budgeted Outflows (Activity) Available
Oak Income -5200 5200 0
Oak Expenses 1500 -1700 0
Oak Comm 300 -300 0
Oak Totals 3200

Assuming the Oak Income is the only income, then your available to budget amount at the top will be the 3200 amount.
You could then do something like the following with the other categories.
Category Budgeted Outflows (Activity) Available
Walnut expenses 1000 -1000 0
Personal Expenses 2200 -500 1500

Question: Can I trust the "Available to Budget" amount on the header? Do I use that to clear out all the red categories? I still have some money in it, but I think I have more red than black, if you know what I mean.

The Available to budget amount should ideally be zero. This will make it easier to see the income coming in and being made available to budget. You can also see when all this money has been given a job.
If you are trying to build a buffer, with everything else that is going on in your budget I would recommend using the Buffer category method of building the buffer.

Question: In re-allocating funds and changing budgeted amounts, how do I keep track of those golden averages that I need to make sure I cover every month?

There are a couple of ways that I have seen mentioned in the forums. I am still getting my feel for how I want things to work so haven't settled on one yet.
- you can put the goal averages (and any targeted maximums) for a category in the category name, or make use of the notes that can be recorded against the category.
- You can put the budgeted amounts in a future month (one or two months in the future). The quick budget tools can then be use to move this to another future month when that month comes around. The quick budget menu is found by clicking on the lightening bolt icon in the budget heading for each month.

I hope this is of some help.
Alison

[sequoiawoman]

Thanks to you all for such cogent and thoughtful replies!

I"m going to re-evaluate the numbers I've put in the averages, to make sure I'm thinking about when bills are due instead of the yearly averages. And I can check to see if we have funds enough to stash some quickly, as YYC27 suggests, and then go forward at 1/12.

Joel, I'm thinking long and hard about your suggestion to simplify categories and have just one master category for the rentals. I like having the whole year at my fingertips, come tax time. Imagine! One click to select Income vs Expense Report and my taxes are done! Wahoo! But there's a lot to be said for simplicity. I could enter the building as Payee--Oak, Walnut, etc.-- and use the memo field as I do now, for individual apartments (so I can check on who's paid the rent this month). Then just have a repair category, a property tax category, a utilities category. More work at tax time, easier budgeting all year long. Decisions, decisions.

Alison, thanks for helping me see how fluid the budgeting is. I have to keep reminding myself that this isn't like accounting software. It's flexible. It's forgiving. You can change your mind about where you allocate money. Thanks for the suggestions on how to keep track, and for your examples. Whew. I think I'm getting it.

So. . . I think I'm ready to dive back in. Thanks so much!

[Joel]

Thanks to you all for such cogent and thoughtful replies!

I"m going to re-evaluate the numbers I've put in the averages, to make sure I'm thinking about when bills are due instead of the yearly averages. And I can check to see if we have funds enough to stash some quickly, as YYC27 suggests, and then go forward at 1/12.

Joel, I'm thinking long and hard about your suggestion to simplify categories and have just one master category for the rentals. I like having the whole year at my fingertips, come tax time. Imagine! One click to select Income vs Expense Report and my taxes are done! Wahoo! But there's a lot to be said for simplicity. I could enter the building as Payee--Oak, Walnut, etc.-- and use the memo field as I do now, for individual apartments (so I can check on who's paid the rent this month). Then just have a repair category, a property tax category, a utilities category. More work at tax time, easier budgeting all year long. Decisions, decisions.

Alison, thanks for helping me see how fluid the budgeting is. I have to keep reminding myself that this isn't like accounting software. It's flexible. It's forgiving. You can change your mind about where you allocate money. Thanks for the suggestions on how to keep track, and for your examples. Whew. I think I'm getting it.

So. . . I think I'm ready to dive back in. Thanks so much!

Good to hear! It really just depends what numbers you actually need come tax time.

The All Accounts view is very helpful to get you any subtotal you could possibly need. Although it wouldn't be as automated.

[los lobos marinos]

Hi,

I know you will be consolidating categories and that is a good way to go btw. But you may want to have a category for where you keep funds for any potential building/fire regulation statutory upgrades. It all depends on the type of building, it's age, construction materials etc. Basically a rainy day category.

Last year for example, following new legislation, we upgraded all the original front doors for each apartment in a small block with replacement fire doors that seal each apartment from smoke and poisonous fumes for up to 30 minutes in the event of a fire and also keeps escape route smoke-free. Not cheap but easily manageable if the funds are saved. The money is kept in a separate category from regular maintenance costs as you know roughly how much annual routine maintenance/repairs costs but changes to the law are irregular and cannot be predicted so easily.

Just an idea to think about.

And good luck!!!

[sequoiawoman]

Thanks, los lobos. Yeah, a major slush fund. I can see using that for the big ticket things, like replacing a roof, or remodeling apartments (any year now, sure)--things that aren't covered by the repairs or maintenance categories.

So, gulp, consolidation, here I come.

[ijd65]

I second Joels suggestion of having one Rental Property budget.

I have 4 properties and I used to use the tagging function in Squirrel to record income and expenses. As YNAB does not have that feature I now use the memo field to record the property name. When I need to generate reports come tax time I will export the data into Excel and use a Pivot Table to separate the transactions. In the interim I can see in YNAB a consolidated view of how much the properties are costing (negative gearing - nice concept when capital growth existed ).

[TLBauer]

Hmmm ... I might do things slightly differently. I'd create Master Categories for each expense type with a sub-category for each property. So, you would have a Master Category for "Repairs" and one for "Property Taxes", etc., with sub-categories for each property.

At the top of your budget page, create a Master Category for "Rental Income" and then create sub-categories for each property. As you are receiving income, post it as an inflow to the appropriate property. The rental income categories are like "rainy day" funds and the incomes will flow from month to month until you need to pay an expense against that category.

In the month that you pay a repair bill or any other expense against one of the properties, you would negative budget against that property's income category the amount of the expense. This money is now available to budget. Now, budget the money to the sub-category for that property's expense. Write the check and post the expense to that category.

The only other thing that I think I would do would be to separate my personal budget from the property budget. But, that would be a personal choice, I guess.