I received an email this weekend asking a very common question about handling transfers in YNAB. The question is so common, I decided to post my response publicly. Perhaps others will find it helpful.
Client Question:
What is the reason to not categorize transfers? We want to transfer money to savings accounts and track balances through YNAB…what are we missing?
My Answer:
It all comes down two things:
- money is fungible
- it’s the Category balances, not the Account balances, that determine the purpose or intention of each pile of money
Money is Fungible
Fungible means that the electronic representation of $1 in an online savings account spends the same as and/or has equal value to a $1 paper check and the 4 quarters in the cup holder in your car. A dollar is a dollar is a dollar. Your account balances merely tell you how many dollars you have and where they are physically located.
Category Balances, Not Account Balances
Your categories are how you allocate and differentiate your intention for each dollar you have. Your intention for a dollar is not tied to the physical location of any particular dollar.
So, lets say you have $400 in checking and $400 in savings. All told, you have $800. In YNAB, you’ve already given a job to all 800 of those dollars. Now you physically transfer $200 to your savings account leaving you with $200 in checking and $600 in savings. But you still have a total of $800. You don’t have any additional nor any fewer dollars; nothing is happening in the Budget portion of YNAB.
A good way to picture transfers is to imagine you’ve got $100 in your wallet and you take $20 out and put it in your pants pocket. You still have $100 but the $20 in your pocket is convenient for paying for the movie tickets you’re about to buy.
Why is this Concept So Tricky?
So why is this concept so tricky for new YNAB users?
A lot of clients come to me with a habit of “budgeting by account.” It’s an extremely common practice and one that banks and media tend to encourage. But it’s fundamentally at odds with the YNAB envelope budgeting system.
To really “get” YNAB’s system, you must learn to completely separate where money is located from what that money is for.
I’ve seen so many people try to synchronize a savings account balance with a savings category balance. Don’t! This effort never fails to get messy but it can be one of the toughest habits to give up.
If you want to save, create a category for the purpose and allocate money into that category. And, do your best to let go of the habit of associating a bank balance with any sort of spending or saving intention.
I hope that helps,
~Elizabeth
P.S. One last suggestion: language is powerful; sometimes when clients struggle to let go of associating account with purpose, I recommend they literally change the name of their accounts in YNAB and not use the word “savings.”
OK, I get that YNAB is bank account agnostic. Everything is based on the budget categories. What I cannot find is any kind of permanent tracking of transfers between categories. If I am going to take money from a “budget for generic savings” and actually SPEND it on something, I cannot find how to document the transfer (except for the 30 days of recent transaction page). I want to document WHERE the money from THAT savings account was spent, and not just see “transfer to checking” $2000.00
I am missing something because as I am using the system now, I cannot trust that I am not going to go bankrupt while having a wonderful YNAB budget because there is very little connection between my actual accounts and what is stored in my budgets. If I make a keypunch error, there is NO documentation to find the error. The history is not documented.
This creeps me out. I love their Zero Budget concept but the accounting practices are horrible and will bite you.
Do most of your customers run a second set of books with another system that handles actual balances and transfers and keeps records of mistakes?
A public explanation would be VERY helpful.
Thank you for your site.
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Good Luck as you work towards ChCF and becoming a fiduciary Consultant. Everybody that I know that is in the business and adheres to NAPFA standards REALLY LOVE THEIR JOBS.
It must be very satisfying.
(The less-than-fully-ethical ones in the business that are commission-based seem to be miserable, as they should be).
Keep doing your good work.
Thanks for your comment, Warren. And thanks for the well-wishes on my ChFC journey. Whew, it’s a lot of work! Honestly, more than I anticipated. I just passed my third exam. At this point I don’t envision changing the nature of my work – I already love what I do. Coaching is my passion and my vocation. I just want to have a fuller knowledge base — all the better to serve my clients. No plans, whatsoever, of moving into commission-based or ad-based or sponsor-based work. I don’t have the energy for divided loyalties 😉
I love your question! You *are* missing something but it’s a “something” that a lot of YNAB users miss. I really hope to do a video on this soon; it’s a topic that comes up frequently in my work.
You wrote: “If I am going to take money from a ‘budget for generic savings’ and actually SPEND it on something, I cannot find how to document the transfer…”
I’d challenge the very idea of having generic savings. What is “generic savings?”
See, “savings” isn’t a thing. In YNAB vernacular, “savings” isn’t an actual job. Stop thinking of Savings as a thing. Savings aren’t sacrosanct. ANYTHING not yet spent is savings. Even next week’s mortgage is today’s savings. On the other side of the coin, ALL savings is deferred spending. Even if you’re amassing a legacy to hand down to your grandchildren, it’s still just deferred spending.
What are you saving for? Or, from an actuarial perspective, what are you most likely to need to use that money for? What’s the mostly likely “next need?”
There are two sides or two halves to YNAB. It’s unique side is the planning side. The side where you give every dollar a job. This is where you’re still missing the step of making a commitment with all of your money. Again, “generic” isn’t a commitment.
The other side, valuable but secondary and not unique to YNAB, is the record of what happened. What you “planned” is important only up to each point in time where the future meets the present and then instantly becomes the past. Once it’s past, the only thing that really matters is what actually happened. Yes, there’s value in learning when plans don’t pan out. Those moments have value if we use them to refine and reconfigure our budgets so that our future planning is more accurate.
In my experience, the lesson of keeping track of my homeowner’s deductible was valuable in that now I diligently keep track of it and keep that category funded. Having to fund that deductible is what I remember and what is important. What I had otherwise planned to do with those funds is long lost to time and holds no value at all.
I’ve been using YNAB for over 10 years and this issue is finally driving me to look elsewhere for budgeting software. No matter what anyone says, I do NOT want to keep my Emergency Fund in a checking account. I make recurring deposits into my emergency fund. When I had a job that could split my check between accounts, I would simply categorize the deposit as “Emergency Fund” and everything worked out great. Now that I don’t have that option, its extremely clunky to reconcile between the account balance and budget category. We understand the idea of budget categories being unrelated to account balances — however, sometimes there are good reasons to do it, and not having the option feels like unnecessary dogmatic/ideological hurdle preventing paying customers from using the software in a way that supports their financial security.
Autumn, I’m sorry this issue causes you so much frustration. I have many frustrations with the software myself – though this isn’t one of them. I do agree that it’s clunky to try to reconcile an account with a category. That has always been the case — even in the earliest versions of YNAB when it was just a spreadsheet.
However, I don’t see this particular software functionality as being related to dogma or ideology. It’s simply how transfers work. Money IS fungible. That’s not ideological; it’s a fact. A dollar in a credit union checking account is equal to a dollar bill in your wallet. WHERE it is located does not matter. Money is only categorized when it comes in or leaves the budget. So once a new dollar is brought in (usually as Ready to Assign), it doesn’t get categorized again until is spent. If an existing dollar is moved from one pocket to another (from your wallet to your checking account, from your checking account to your savings, etc) that’s a transfer.
If it’s absolutely critical to you to match a category balance to an account balance, you could always make your EF account a Tracking Account (aka Off Budget account). That way when you transfer funds from your checking into your EF, you *must* give it a category.
I have a whole category group called “Spending that isn’t Spending” with categories for my HSA contributions, IRA contributions, non-retirement investments, and U.S. I Bond purchases. When I make a contribution to my HSA or IRA, transfer funds into my taxable investments, or buy I Bonds, I categorize those transfers accordingly.
I understand the concept you’re describing but I still feel more comfortable keeping a Savings budget category in YNAB with a synchronized balance to my actual Savings account. The reason is to protect me from overdrafts of my Checking account, where all the money I spend comes out of. If I have a bunch of funded categories, but in the real world all those funds are sitting in a Savings account, but spent out of my checking account, my checking account will soon go below zero and incur overdrafts
I understand what you’re saying, Tyson, but I stand by my position. The question of *where* money is is best completely separated from *what* money is assigned to do.
I recommend dealing with the question of checking account balance as a completely separate question. One of the things I help clients do is establish a “floor” and a “ceiling” for their checking accounts (and savings). Then using these numbers as automatic reminders to move funds as needed to either bring the checking account balance up to the floor or transferring funds out of checking into savings (or, when you get to the point, moving funds out of regular savings to your high yield savings account). What should your floor be? Well, as I always say, “it depends.” Because every person’s situation will be different. But a general guideline is to keep one month’s worth of bills in checking. Anything more and you’re leaving money vulnerable and under-utilized. Anything less, as you run the risk of fees and penalties if something happens and your system needs to run itself for a few weeks. This is the difference between “using software” and “building a system.”