I’ve been fielding reader questions at Get Rich Slowly for almost six years now. In that time, we (you and I) have answered 202 questions, most of which have been about the Big Picture, about things that apply to everyone. Sometimes, though, it can be interesting to get a bit more specific.
For instance, Julie wrote recently with a question that, by her own admission, is technical and fussy. Well, let’s be technical and fussy for one day, shall we? Here’s what she writes:
I currently have several different targeted savings accounts that I fund with either direct deposits from our paychecks or automatic withdrawals from our checking accounts. I use an Excel spreadsheet as a budgeting tool, partly because I didn’t want to spend on software, partly because I was familiar with Excel, and partly because it’s simple to download my transactions from my credit union. I can create categories within the online tool to compare to my spreadsheet based on what I want to track.
As I currently do things, the money that goes to the targeted savings accounts is coded as “Savings”. When I spend anything on something from those accounts — for example, the escrow account for our property taxes and insurance — I code the withdrawal as a negative expense in Savings to correspond to the expense in the Insurance or Taxes category. At the end of the month, it comes out a wash, but at the end of the year it looks like I have a negative balance in savings when in fact we saved aggressively.
Another time this is an issue is when we dip into the emergency fund (hello, new furnace!). At the end of the month, it’s a wash but at the end of the year we show a negative balance on the spreadsheet.
So, I guess the question is: When you withdraw from Savings, is that income? Or is it negative Savings?
I receive quite a few questions like this: People have developed their own tracking systems, and they want to know what I think. What I think is that each of us does this differently. There’s no one right way to track your finances. The important things are to:
- Be honest. Make sure your system accurately reflects your financial health. Don’t play with the numbers to fool yourself — or your spouse.
- Be consistent. Once you decide to track things a certain way, stick with your system. In Julie’s case, that might be an argument to stick with the “negative savings” method.
- Aim for effectiveness. If your system is ineffective — if it doesn’t give you the info you need, or if you don’t use it — then there’s no use keeping it. So this might be an argument against Julie’s current system. Maybe she needs to switch to something that doesn’t leave her confused.
It’s also helpful if your system plays well with others, but that’s not an absolute requirement. I’ve customized my Quicken installation enough that I can’t just download info from the bank; I have to enter it by hand. I’m okay with that, though. Just be aware that the more you customize, the more you’re tying yourself to your customized way of tracking things.
As for Julie’s specific case, it sounds to me as if she may be tracking cash flow — the ongoing movement from one account to another. This can be useful in some cases, but when I am looking at bank accounts, what I really care about is the balance, not how much is flowing in and out. (Well, sure I care about the cash flow, but for budgeting and reporting, it’s the balance I want.)
For instance, my targeted savings accounts are:
- Emergency Fund
- Mini Cooper Replacement Fund
- Travel Fund
Sometimes I have more accounts, but those are the three I have right now.
When I route money from my checking account to a savings account, my savings account balance increases. But when I take money out — to travel to Peru, for example — my savings account balance declines. At the same time, that money gets spent somewhere else. (In this case, I code it as Vacation.)
So, to answer Julie’s question, I’d view this not as income but as negative savings. To me, it’s income when it enters my possession. Once it’s in my possession, it can’t be income again, can it?
In some ways, saving is just delayed spending. I’ll build my savings for a car over the course of years. When I pull the money out of savings to buy the car, that money isn’t income. I’ve already earned it. It was money that was in savings, but now is being spent elsewhere.
Is all of this as clear as mud? How would you handle Julie’s dilemma? How do you decided what is income, what is savings, and what is spending? When you take money out of savings, is that income? Something else? I know many GRS readers have created customized spreadsheets to make things easier. Is that you? Can you describe your system for us?
This week, let’s help Julie be fussy. Next week, we’ll return to questions about the Big Picture.
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I consider it negative savings. For me income is when money comes to me from outside. Movements within my own accounts would be positive savings if it’s going to the TSAs, and negative savings if it’s coming out.
At one point I handled all of my cash tracking by rounding to the nearest dollar, but used coins in order to do my laundry, so I did in fact use an “Income” category for change for laundry. But after enough time of tracking I essentially know how my cash usage splits, so I just simplify at the time of the ATM withdrawal now.
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The way I view it, I can’t name it either income or negative saving.
It is not income since the money is yours already. Whether its saving or checking, doesn’t matter. Its your money which you already earned.
It is not negative saving (honestly, heard the term for first time) because its a straight and simple spending which lowers your net saving. Your concept is fine but, the term seems fuzzy to me.
Why complicate personal finance with new terms? Keep it simple Julie! Your spread sheet will be easier to manage by having only two categories, Income and Expenditure. a kind of profit/loss statement.
If you make finances simple you’ll achieve many great success in managing it and will have less headaches in future.
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I agree! Especially with the no need to complicate it and to keep it simple!
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It seems like you are in the dilemma to normalize your net worth..which is reasonable. In other words, you want to make sure you capture the money set aside for property tax as an asset, but also record the property tax as a liability..so its a wash.
For simplicity sake, record all savings as savings and when you have to pay out of the savings, record it as an expense…you’re only making it harder.
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It’s kind of nice to have a separate tab for “Net Worth” that has your big assets & cash/investment account totals pulled into it. It’s not too hard to set up, and having that in the front of the document before you see the cash flow/spending stuff can be really nice.
Mine doesn’t have investment accounts on it, partly because I would have had to hand-enter them when I first set it up, and partly because the fluctuations in those can hide changes in the other savings (our emergency fund is full, so the goal is for the totals on the front page to not change much at all – not go down OR up. Excess gets dumped into an investment account, invisible to the cash management tracking.)
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One distinction that has been helpful for me is to separate savings from delayed spending. I use “delayed spending” for things like my next computer, travel, future bills, etc. Once it’s spent, it’s not part of my net worth.
On the other hand, “savings” is for retirement and my home down payment fund. It’s money that will (hopefully!) appreciate and grow my net worth.
I’m not quite sure how to classify my emergency fund. I guess it has it’s own label
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I’m with you – I have “irregular expenses” for most periodic things that are less frequent than monthly (trash, sewer, car insurance, replacing tires and other car maintenance). Of course pulling from the emergency fund isn’t periodic/irregular – it’s an emergency. Maybe just label it as “unexpected expense” or “emergency expense.”
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Julie, I suspect I use a similar system to yours, mostly because I love Excel…
Right now I have several targeted savings accts. Three are with ING: One for expenses (and missed paychecks) associated with the upcoming baby (25 days and counting, +/- 5%), one for going to Disney with my sisters and their kids, grandparents, etc. (supposed to be this year, but see previous savings account), and one for a new bed. Each payday, I transfer a set dollar amount from checking to the separate ING accounts.
When it comes time to spend the money in the savings accounts, I transfer it back into checking (transfer from Disney account) in time to pay the credit card bill.
To me, the whole point of the targeted savings account is to zero it out when the target is met. I also have a 2012 property tax account, which I fill up all year, then zero out in September (when my property taxes are due). If I have a need to know how much I saved in an account over the last year (or multiple years, in the case of goals like grandchildren to Disney), I just look at the amount transferred to checking or the balance before the big withdrawal.
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I get around all this by being even fussier with my categories.
I track money going into TSAs separately from the broader ‘Savings’ category. Its Car Savings or Vet Fund or Travel Savings. When I transfer that back in for use, I have a separate income category for it to. ‘Xfer from Savings’ as opposed to just a deposit.
This way I can separate it all out from my larger savings/income breakdowns. Sounds like a pain, but usually I don’t have to deal with it too often. Ideally, TSAs are used infrequently.
I too use my own excel “Spreadsheet of Life” as my husband calls it.
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I do something very similar with my spreadsheet. I have an expense category for “funds transferred out” of my checking account and into TSAs. Then, when it comes time to spend the saved money I have a category for “funds transferred in” to my checking account. That way it’s not income from say a paycheck, but it is still tracked as money coming into my checking account. I also have a category for “total savings” where I add all my TSAs together so I can see how well I’m doing with my savings goals.
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If savings are income, then do you need to “save” 20% of this savings income to maintain a balanced lifestyle
For me, I’ve a mix of GNUCash and spreadsheets. The spreadsheets handle the directed savings/sinking funds (we’ve no ING style accounts overhere). Money goes in as savings. Money comes out when required and in the case of the sinking funds, I just check to make sure I’m have money in the account before spending on my wants. As such, it wouldn’t count as income.
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I would not consider it income. It was income when you earned it. I would also not consider it negative savings. That term just describes a situation where you spend more than you earn. A synonym for “negative savings” is “debt”. Spending from a savings account is neither. I have a “periodic expense” account with ING where I direct a certain amount from my paycheck each month. This is to cover future expenses that don’t occur every month. Whenever the expense pops up, I transfer money from savings to checking to pay the expense. Thus, when I remove money from savings, it is an expense. That’s true whether you are saving for a car, a vacation, property taxes, or whatever. You are saving for a future expense, so I would classify any removal from cash from your savings account to pay for something as an expense.
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Me too. I use Quickbooks and if money is transferred from savings to checking (to cover an expense, which is what it’s there for) it’s simply a transfer. It’s not income. New deposits are income.
Tangent: If I take money out of my checking account via ATM or cash back from a point-of-sale, it gets entered in QB as an expense because the entire purpose of cash, in my world, is for ready spending.
I don’t bother entering cash transactions in QB because they are all trivial incidentals. Cash out is understood to be spent.
Back to point of OP: I don’t have multiple savings accounts but I don’t anticipate treating them any differently when that time comes.
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In our family we believe money that is set aside to buy things later isn’t savings at all – it’s an expense. This includes all insurance and taxes, future car expenses & purchases, even our home repair fund. Those are expenses, right off the bat. We use a very similar spreadsheet system for our cash flow planning.
There are many benefits to this as we see it: we get a more real picture of our monthly expenses, even those expenses that most people call an ‘emergency’; also when the big expense comes due (time to buy the mini/fix the furnace) it’s quite painless because you’ve already ‘spent’ the money (by your previous monthly contributions to the target account).
Philisophically we prefer not to confuse true savings with spending, even if the spending is delayed by a year or more. For us the only money that is considered savings is money that won’t be spent for a long time (retirement account, other investments, etc.).
We also consider a home purchase to be an expense/liability instead of an investment/asset (the house costs you money to have, so it’s not an asset). You might get money back on what you put into it, or you might lose some of the money you’ve put into it – so it’s best to call everything related to the house an expense.
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I also have been toying with this idea of treating targeted savings as spending. So long as I am living a lifestyle that involves home ownership, car ownership, travel, etc., the amount I’m budgeting is going to get spent. If I count it as spent the day I put it into savings, then my spending looks more realistic. (In good months, when nothing breaks or comes due, it sure looks like I spend almost nothing, but I spend plenty.)
There are some problems, though. 1) You might not be budgeting the right amount. Once you know exactly how much you’re spending, you can see that all those monthly estimates were a bit off. (But at that point, you tend to adjust your budget which puts your numbers back on track.)
2) If you haven’t actually spent it yet, you can still change your mind. Maybe at that point, you can call the money you free up by changing your mind “income.” It’s sort of like when you buy something and then sell it later, the money you get from selling it is “income.” Only you didn’t actually buy the thing, so you don’t worry about the value of the thing having changed between the time you bought it/saved for it and the time you sold it/changed your mind. You could also change your mind about how to achieve that goal, finding a way to do it for less money.
3) Calling the savings an expenditure right away doesn’t give you a picture of the level of flexibility you have to change your mind. Or your flexibility to move money from one target to another. But if you calculate both your real net worth and your net worth not counting your targeted savings, then you can still get a picture of that flexibility.
4) All my savings are targeted, so it looks like I’m saving nothing at all. I can still see that I’m saving X% of my money toward retirement (or whatever goal).
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Those are all good points, Debbie – it’s true that a person cannot estimate all future larger expenses exactly and there’s a need for flexibility.
Since the money we earmark toward every budget category is initially counted as an expense, we find if after a couple months we have too much money set aside for a specific category, we simply move the money to another category without counting it as income or an expense or anything.
We have a propane tank for our gas applliances which gets filled very infrequently. Our $15 a month toward propane ended up giving us leftover money after it was last filled, so we adjusted the monthly amount to $10 and also moved the the leftover $50 to our car repair category. We didn’t count that transfer of money from propane to car repair as income or expense or negative savings or anything – that money just has a new name now.
I hope this makes sense! I suppose it would help to see how we keep track of our monthly amount allocated to budget categories, rollover from previous months, and money spent from each category every month.
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Kent, I do the same thing as you. It’s nice to see that another person budgets in this manner since I thought I was a little anal. The great thing about this system is the fact that the money is there, even for that emergency car breakdown, that doesn’t require a tapping of the ER fund to get it fixed. Seems I can always count on one thing going wrong with my vehicle every year and know that the tab on the problem will cost (at most) $3000. So, it’s no longer an ER budget item but a “hope for the best plan for the worst’ savings account. And…at the end of the year, if the money set aside for these hypothetical repairs or additional expenses has a positive cash balance—I throw all the unused money at the mortgage like it never existed. I start all over again every January–building it back up– knowing that my ER fund is there in the process of accumlating.
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Cool. I’m going to start using this method.
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This is also how bookkeeping in a company often works. If a certain expense happens say once a year, each month 1/12th of this expense is booked as costs (“reserved for xxxxx bill”). Intuitively this is right, too. Sometimes at home you don’t need to do this. If you cut your hair at the hairdressers every three months, you are probably not saving up 1/3rd of the costs each month, too much hassle. But for bigger expenses it can be very smart and worthwhile to save up a portion of the bill each month.
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I do exactly this for the hairdresser actually. But it does cost about $175 each visit, so I would rather spread it out over 2-3 months instead of at once.
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I’ve only been at this for a couple months and this is how I’ve been setting things up. The one issue that has come up is that I don’t know how to track the actual expense. For instance, I put $75 per month in my car insurance account, which I pay in full every 6 months. I put the $75 transfer into the TSA as an expense, so it looks like I’m spending $75 on car insurance every month. Then, this month my car insurance payment was actually due. I transferred the money to my checking account (coded as a transfer) and then paid for the car insurance. I tracked that as car insurance, but now it looks like I spent a lot more on car insurance than I did since it’s counted twice. How do you code the transaction where you actually purchase the item at the end? The answer is probably obvious, but it’s just not clicking for me for some reason. Thanks in advance for any help!
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When you transfer the car insurance money back to your checking account, mark it like you would a return of an item to a store (a negative expense). It’s like you returned the item so you now have a positive balance in the budget category for the 6 month amount. Then when you spend it, the money available in the category goes back to zero.
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I have the same targeted savings setup as Julie does, but I guess I name things a little differently. I’m also not clear on how the “savings” net can ever dip below 0. Even if you spend all the money in your short-term accounts, if it’s “savings” going in and “savings” coming out it should net to 0, right? Did I misunderstand?
I call our savings to our short-term accounts “transfers.” It’s meant to come back out, so it’s “transfer” again then.
I don’t think it matters what you call it, but if the negative (how?) balance bothers you, only use the word “savings” for your long-term savings and use another word for the short-term savings.
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She might be counting money that moves from “savings” into another savings vehicle, like a 401k, as an expense. I tend to think of it that way – it’s kind of the flip side of thinking of short-term targeted savings as expenses. I’m buying stocks just like i buy groceries.
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I “pay” savings as if it is an essential bill and any removal is considered as negative savings… once income of any sort goes into savings its in its own savings world.
Now, technically, since I use mint (and really want a better option I can use on my Mac — any suggestions???) it is a transfer to savings.
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In regards to alternatives to Mint. Have you investigated Monydance? It runs on Mac, Windows and Linux. Plus, there is an app for the iPod/iPad/iPhone that synchs with the main program for mobile access to your data…
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YNAB! I love it.
http://www.youneedabudget.com/
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I use an Excel spreadsheet as well. I have two basic categories, Income (money that comes to me from some source) and Spending (money that goes out from me to another place), with obvious subdivisions in each group.
Money going INTO a savings account is noted under Spending: e.g., my paycheck goes to the mortgage, groceries, gas, and savings; the money went out somewhere else, in this case a savings account. Money coming OUT of savings is noted under Income: e.g., I dip into the house-repair fund for the chimney liner I’ve been saving up for; money came to me from a source (savings).
The important thing is that it all zeroes out at the end of the month.
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This is a common question with non-accountants unfamiliar w/double entry bookkeeping. Even business people frequently ask me “if I made profit last year, how come I have no cash?”
I tell them cash flow does not equal net income. You’re basically treating transfers of money as income/expense when they’re really not. Perhaps you could set up a separate line item or column in your spreadsheet for transfers?
For your furnace example, I treat that as a transfer to my house (set up as an asset in Quicken) for the cost of the furnace.
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For a business that makes sense, but for a homeowner…if we sold the year we put in the new furnace, it probably would have raised the value of the house. Selling 5 years later, probably not. I’m not going to track depreciation, so it seems silly to add repairs to the asset.
Car repairs make that really clear; I just spent $750 on my car, and it definitely didn’t add $750 to the resale value.
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This post got way long. Technical alert! Skip the paragraphs in [square brackets]if you’d rather skip my accounting musings. ***mark the actual Excel techniques
[There is usually a tension in Excel between getting the 'big picture' right and tracking all the little bits as accurately as possible. As long as you know what your Excel means, it need not follow all the accounting rule technicalities
]
[The crux of the question seems to be getting reasonable net savings flow information from all of the $ flow details entered in Excel. And possibly to get accurate account balance info as well.]
***On the flow side, one simple solution would be to count the income that goes into savings as ‘positive savings’ – then your cash flows for savings will foot at the end of the year. A transfer from ‘income’ to ‘savings’ may be the easiest way to tag this.
***Still on the flow side, if you are using Excel to track expenses & savings but have a separate method for tracking income (employer tax forms, etc) then you could instead tag the income that goes into savings as ‘positive savings’ in the first place (don’t bother putting it into ‘income’ first) – this isn’t super complete accounting, but might work just fine for you. It would mean that summing up your income would not match your tax income – it would leave out savings. Either the ‘transfer’ method or footing tax income to income+savings in your Excel would solve that issue.
[Tracking balances in Excel...means a few more steps. And lots of accounting asides. ]
[The "balance sheet" is where formal accounting keeps track of bank account (and other asset and liability account) amounts. Cash flow and income & expense feed into the balance sheet, but you need some additional information (say, starting balances) and links (a way to tag which income/expense items change account balances & which don't) to make that all work.]
[For formal accounting there are all kinds of rules, for your own personal Excel spreadsheet to track balances you may find it easiest to create a second sheet and keep track of balances there. Or you could keep everything on one sheet, with a list of balance sheet accounts (likely easiest at the top of the sheet or after all the income & expense items at the bottom of the sheet).]
***Some possible ‘balance’ techniques in Excel (broad strokes). I assume that you are using a line for each transaction in Excel (if you use a column for each transaction, where I say “column” you would want to think “row”). On your your original sheet (the one with income & expense and cash flows) you could add a column for ‘balance impact’ (for $ amount) and another column for ‘balance account’ (so you know if this is for ‘car savings’ or ‘emergency fund’ etc). Then create a second sheet that tracks your balances, this second sheet refers to those new columns on the first sheet to pull all the flow info. Basically the second Excel sheet needs the names of the accounts whose balances you want to track and their opening balance amounts. Then you sum all the changes to those balances from your income & expense/cash flow sheet and add to the opening balance. That should get you ending balances.
***There are many ways to set up a balance sheet and its links to income & expense in Excel, if you like functions you could do this all with just 1 extra column on the income & expense and cash flow sheet (use consistent labels and the balance sheet could use the sumif function with the “if” part matching the account name and the ‘sum range’ pointing at the $ flow already entered). Or you can create a separate column for each balance sheet account in the income & expense sheet, enter the $ flow impact in the appropriate column, and transfer the sum of each column to the balance sheet. Or…you get the idea. The big picture is to identify which income/expense items affect a balance sheet account, what account it is, and what the $ amount is.
[One more accounting aside - it's true that in formal accounting, "cash flow" does not equal "income & expense", but for personal Excel spreadsheets it might. In accounting, debt flows ($ in from borrowing and $ out to repay principal) are one big difference between income & expense and cash flow. For personal budgeting in Excel, you can easily fold in the debt flows on your main sheet without necessarily creating a whole second sheet for 'cash flow'. If you are excited about having completely separate sheets, it may be just as easy to switch to an accounting program instead of building your own in Excel. But if you love data DIY-ing, you may actually enjoy building your own in Excel. There are some already set-up Excel templates/files out there as well.]
[As far as the furnace expense...well, it all depends what you're tracking! If you don't have a balance sheet & are folding cash flow in with income & expense, the furnace is a regular expense for you. If you will need to calculate what your gain on sale of the home is when you sell the house, you'll want to keep the any receipts for 'capital improvements' someplace (capital improvements reduce the gain because they add to your basis-the number that you subtract from the sale price to calculate the gain). Most businesses get to count depreciation as a tax-deductible expense, but individuals don't, so you many of us have no reason to even think about depreciation, much less track it.]
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Thank you for the technical answer!
Personally, I just use Excel for cash flow tracking and only figure out total assets when we have all the documentation together at tax time. Some people find the net worth calculation motivating, but between the stock market & the housing market the last few years, including that stuff in the monthly document was giving my partner anxiety nightmares.
I don’t do targeted savings, so I don’t run into the double-entry problems the original poster had, but thank you for the reminder on the cost basis records for the house – we got new windows last year & I don’t think I added the receipts to the file!
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I also would not consider money from savings to be income. During the month, I may add the amount spent out of savings to my “income” column just to see how balanced I am against my actual monthly income and spending, but at the end of the month, I just deal with my spreadsheet looking like I went over budget for my monthly income vs. monthly expenditures. At the end of the year, it all balances out.
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I use YNAB and about 10 ING accounts for various targeted savings (which I have set as “off-budget”). I consider the money spent when it goes into the savings account in whatever category it was for.
So if I save $100 a month for a vacation, and want to spend $1200 on it, I would have an outgoing expense each month of $100 to an off-budget savings account with the category of vacation. When I have the $1200 in there, I transfer it back to an on-budget checking account, with the transfer also categorized as vacation, so I now have a positive balance of $1200 in my vacation category. So the transfer to/from the savings account is a wash, but at the end of the day none of this money is really considered “Savings” (since the whole purpose is to spend it!).
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I use YNAB as well, and I have tried this approach before, but I don’t like how it impacts the end of year (EOY) analysis (for setting next year’s budget). Because it came in as a postive to the budget category, it balances out the expenses for the category and at EOY it looks like there was no expense for that category at all. So I bring in the vacation savings as income and then budget it to cover the expenses – actual expenses for the category are maintained.
I’m not worried about maintaining income figure for a month as actual wages/salary. To me, income for a month is the amount of money I have to spend for the month, and transfer from savings is part of that for some months.
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This doesn’t happen the way I do it. The expense is basically recorded 3 times (for example):
Savings to an off-budget account: $50 budgeted, $50 outflow x 3 months
Transfer back to on-budget checking account: $0 budgeted, $150 inflow, makes a positive budget balance of $150
Actual spending: $150 outflow, bringing the category balance to $0
I’ve basically had an outflow of $150, an inflow of $150, and another outflow of $150, for a net outflow of $150.
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I would consider it a debit from savings and not income. If you are like me, then when you make the withdrawal from your savings account to pay an expense you already saved for, it is a small jab to the heart because your overall net worth goes down.
It is a psychological game but for large purchases that I am saving up for, I do not include those into my net worth. I keep track of them but don’t include it in my overall total. For example, we have a trip coming up and we saved and saved and saved and saved the $15k for the vacation. The money was in our travel savings account but I didn’t include it into our net worth because I knew the $15k would have to be paid at somepoint and I didn’t want to think our net worth dropped that much.
For me, I think of my targeted savings accounts for purchases I KNOW I have to make at some point as extensions of my checking account.
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Wow, what kind of trip costs 15K? I’m not being snarky – just curious.
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It could be anything. It could be a month long tour in Europe or they could have rented a house somewhere for the whole family for like 2 weeks in St. Thomas and flew everybody down. Yes you can vacation on the cheap, but it is really easy to spend 15k. I was looking into a 2 week chartered trip to Italy for 2 people and with airfaire it was anywhere from 5k-10k+. Yes I know you can do it all yourself cheaper, no tours, etc., but that wasn’t we were looking for, we didn’t do it though because 2 weeks at this time was hard to arrange.
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I agree it could be anything. My other half dreams of going on a guided Arctic tour some day… $15,000 is about what it would cost for the both of us, maybe more. I have a cousin who went with her husband on a cruise around the world on the Queen Mary, and for both of them it was close to six figures.
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I was hesitant to say how much the Ecuador and Galapagos trip cost because I thought it sounded pompous but I am really proud that we could save that amount. My husband and I have been putting money aside for years for this trip. Instead of getting a new car, after the car was paid off, we put the monthly amount that would have gone for car payment towards our Galapagos trip. After a while, and a few generous bonuses, we have the money! I would never have spent the money on the trip if I saw the money in our net worth because it would have felt ridiculous; however, keeping it out of our net worth doesn’t make me think I “spent” the money. Again, mind games!
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Good for you! That is an awesome acomplishment and you should be proud of it. It is this kind of stuff that makes good budgeting practices so worthwile!
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Sounds like an awesome and well deserved trip!
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Congrats! That will be a great adventure. I went to Ecuador in ’93, though on a lower budget, and had a wonderful experience. Loved the Galapagos, the countryside of Ecuador, the food, and the people were so very friendly. We went into the Ecuadoran Amazon (LaSelva Jungle Lodge), Banos, the market in Latacunga, the bus/ferry down the mountain from Ambato, Guyaquil, Quito, and so much more. It was so worth it, and I’ll always remember this trip!
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I track with Excel too. I’ve not yet had to use my emergency funds to pay for something (knock on wood), but if I did I would just make it a negative on my savings line. I like to track my income separately so I can see my take home pay for a year or whatever period.
When I get a tax refund or a birthday gift of cash, it gets hard to categorize so I usually put birthday money as a negative gift/charity expense; and tax refunds as negative savings.
Glad I’m not the only anal Excel personal finance nerd in the world who tracks everything they spend and earn…
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I would never code income/revenue twice. Also, when auditing your savings accounts I like to simplify the process by monitoring the qtr over qtr percentage increase. If there is a decrease and the account is a reitrement account….well then no amount of excel organization/documentation can overcome a misstep in discipline.
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I have NEVER withdrawn from a retirement account, but mine has gone down many quarters in the past. Q4 2001 and all of 2008, I’m pretty sure.
It’s not just about discipline.
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I think you can only count revenue one time. Once you bring it in from the outside it is income, but once in your possession it is your savings, spending money, rent money, etc. I think the most important thing is budgeting your money wisely and tracking your accounts regularly. It sounds as if Julie is doing that, she just needs to mentally draw a break between her different types of accounts and the spending they are reserved for.
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I’ve actually had a problem with my Excel spreadsheet custom budget tracking thingy that seems to be along these lines. Here’s what I did about it.
In my case, I was having issues with my credit card. Naturally, I wanted to track credit expenditures, but also track debt-payment expenditures. But I did it wrong, and between using the card and paying it off, every dollar on the card was being counted twice. Luckily this was a good problem to have because it meant I was underspending instead of overspending, but it was still a problem that needed to be fixed.
After relentlessly filling half a Moleskine with various attempts at solving my dilemma, I finally had a “duh” moment where I realized that spending credit really isn’t the same as spending cash. In effect, it’s like two different buckets. One for credit, and one for cash. So my credit expenditures are tracked separate from my money, and then money is spent to pay it off. It’s the small stuff like that that we might forget to put in an Excel spreadsheet (although personally I wouldn’t exchange my spreadsheet for ANY commercial software).
I think you could do the same thing here. You seem to have two sources of savings: Direct Deposit, and Income. The money you save from direct deposit never touches your income bucket. It is, as far as a spreadsheet is concerned, magical free tooth fairy money. It shows up out of nowhere and makes you a richer person. Of course I am assuming your listed income is your after-tax paycheck.
To set up your tooth fairy money, you should have a column saying which bucket it belongs in. So, the column would say either “Income” or “Direct Deposit” or whatever labels help you the most. Then you use something like a SUMIF() function that only adds up sources from the correct bucket for whatever you are trying to calculate.
This is a long comment, but I have a ton more to say if you’re interested. If you want to get in contact with me, navigate to my blog http://www.theReverbSignal.com and use the “Contact Us!” link. Yes, it’s a music website, but I’m also an avid Excel nerd and I would gladly help you optimize your spreadsheet. Or, maybe I could even learn from it
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I actually have this problem in my Quicken budget.
Money paid to a vendor on a credit card is categorized as the actual expense (“spending money”, “Gas,” whatever). Thusly, it is reflected in my budget analysis.
Money paid to the credit card to pay it off is listed as a transfer, therefore according to Quicken, no money was spent.
But when making my budget, I have to account for the fact that there’s $800 missing from my income! That’s $800/month spent above and beyond any charges to a card, meaning if I charge $20 to a card and its debt reduction payment is $100, then I send $120 to the card. [I know some of you will say this is bad financial management and that may be so, but I'm getting points on the card and the amount owed every month is going down so I call it a win.]
This issue has resulted in me just not tracking my budget versus actual spending in a while. As long as my savings amount keeps going up, my credit card balances keep going down, and all my bills are getting paid then I’m going to stay away from nitpicking at my system.
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This is double entry book keeping, and it is correct.
You could just make an exact duplicate of your Savings column (=cell_range). When you take money out of these funds, register the negative savings transaction *on the duplicate* columns, and calculate your balance using these, too. This way, your original Savings are kept intact and you can have a nice transaction history that will correctly display your efforts.
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“but at the end of the year it looks like I have a negative balance in savings when in fact we saved aggressively”
Savings is money to be used in the future, either in retirement or for non regular purchases. The thing is – if it’s all a wash at the end of the year – you’re not saving aggressively, you’re spending everything you earn. If you are in fact *saving* money – (ie. you have money left in the savings acount) it shouldn’t have a negative balance. I think part of the problem is how you’re labeling things. you think you’re saving all this money – but then you spend it – so you want credit for ‘saving aggressively’ which isn’t apparent in your spreadsheet. All that means is that you have significant irregular expenses that should be part of your monthly budget. If they really were a bunch of one time things – than over time your savings account balance will reflect that. I had a similar issue till I took a 6mo look at my expenses and averaged it out – I realized I was paying on average $100 per month on my dogs (between vet, vacation care, and food), and I would have cyclical months where I spent a lot on groceries or eating out, and other months not so much. Or the months where quarterly bills were due. I had been using my bare minimum to calculate my ‘budget’ but the 6mo picture has helped me see how much I really need to cut to start actually ‘saving’.
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I completely agree with your assessment
“The thing is – if it’s all a wash at the end of the year – you’re not saving aggressively, you’re spending everything you earn.”
I use a “savings account” as a temporary holding location for future purchase, i.e. taxes, Christmas, insurance, etc. but I don’t really considering that savings. I think you need to label this something different so you can see what you’re actually spending (since these are indeed expenses, not savings).
Ultimately all savings get spent eventually, but I think maybe give yourself some sort of parameters. Such as “if I plan to spend it within 1 calendar year or within 12 months, it’s not savings but delayed spending” Think of your savings as something you set aside without any immediate plans to touch in the near future.
I think the reality is you’re not saving – if all the money you set aside gets spent every year, then that money is an expense, not savings. Try to start saving more in the “rainy day fund”, in addition to saving for those expenses.
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I use a combination of GnuCash and spreadsheets, and handle this situation very simply.
When money arrives at the savings account (e.g. from a paycheck) then it is “Income”.
When money leaves the savings account (e.g. to pay the tax man) then it is an “Expense”.
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I think the letter writer might benefit from a basic financial accounting course. The accounting profession has established basic disciplines about how to track cashflow that can be beneficial to those of us who are a little “obsessed” about tracking our finances. I had to take one of these courses for my program of study, and have found it very helpful over the years. (Now, mind you, I’m talking about the basic stuff, not the advanced concepts!)
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Generally, when we take money out of savings, I consider it negative. However, I would not consider the money taken from the escrow property taxes as a negative, but it wouldn’t ever have been classified in our budget as a savings line item in the first place. Obviously, the money would be in a savings account, but if I were to see a line item savings balance increasing that I knew must be spent (like taxes), I prefer to think of it as not being part of savings at all.
Maybe it’s a silly psychological game I play with our finances, but it helps us not to overspend.
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All I care about are balances as well. I don’t have separate saving accounts for different goals but I do have separate savings accounts, mainly for diversification. I don’t look as savings as delayed spending. I look at spending as balance reduction and determine if the outlay is worth it unless it is emergency then it doesn’t matter. But since i charge all emergencies on my Upromise reward card, I try to pay them off with incoming income, unless they are more than 2k. Savings are assets, not income, so you are talking about asset reduction. Since the small stuff is second nature to me, the big picture takes care of itself. I simply keep all regular expenses on excel, minimize/maximize what I can and focus on getting as much into savings first, then I decide later if I want to remove anything for discretionary purposes. I apply this to all savings including retirement accounts with the goal of increasing balances regularly. I am super frugal so its not a willpower issue to save and thus I have money for my needs and wants. I have a balancing equation that gets me splurge as necessary. When frugality (x)+ savings(y) is greater than or equal to Divorce (z) then Spend (A)
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For me, I have 1 “Savings Account” that I don’t even think of as savings since every penny in there is account for. I create sub-funds within that account that I manage in a similar fashion – using a spreadsheet to track fund balances and withdrawals. I use this 1 account for things like property taxes, my automated IRA monthly withdrawals, homeowners insurance, as well as yearly maintenance type expenses like having my gutters cleaned and my Christmas fund. To me, this account is just a holding tank.
I have another savings account this is just for “emergencies” (ideally) that gets money in but should rarely get money out.
I then have 1 more savings account that I consider my “Saving For” account. It also has some funds but these are for things I plan to spend money on, new car, vacations, basement remodeling, etc. I do think of this as savings, but I also know that the goal is to actually spend all this money at some point to…it’s just a way to help me pay cash and not get sucked into buying now and figuring out how to pay for later. It’s also my plan to avoid debt in the future.
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This may not work for you (or anyone else) but for me, I don’t count it as Savings in the first place. If I know I am “saving” for an irregular expense, I count it as monthly spending. So, even though I pay my car insurance twice a year, I keep a monthly line item for it and just store the funds in a savings acct. I do it that way because I like to keep track of what our ‘actual’ monthly expenses are, so I always want to know how much an irregular expenses is costing me monthly.
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Sounds like an accounting dillemna. You put money into savings, buts it not being tracked as positive savings in your system. So when you withdraw something, it looks like you started with zero and then withdrew X amount and now you have (X.00) in savings.
When you pay out of savings, if you are using an accounting method, you would debit your expense and credit your savings(expense goes up, savings goes down) to accurately reflect where the money went. However, when you automatically deposit into savings, you need to debit savings and credit whatever your main account is(total income is 400.00, 100.00 is deposited into savings, so you debit income 400, then you credit income 100 and debit savings 100).
Or something along those lines. It just sounds like you arent giving yourself credit for the money you deposit. Unless you are taking out more than you put in during the period of time you are tracking. In which case, everything is fine and you just need to reallocate the money going into your accounts.
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I use GnuCash to track my spending. It’s free and is a full double-entry accounting system. I highly recommend it to people who are serious about tracking their money.
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Accountants please correct me if I’m wrong, but savings is neither Revenue nor Expense, but Equity, yes? If you spend your savings you reduce your equity.
If saving for a target purchase and in more pedestrial terms then it’s a delayed expense like JD said.
Income–>Savings–>Expense.
The only time savings would become income is when it earns interest. And then only that portion. No?
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Yep. This is what I was trying to say, but im fewer words and in a way that is easier to understand.
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Savings is both an asset and net of any future liabilities, yes equity. If the savings were to pay a future liability, in this case household maintenance for a new boiler, then the asset and liability offset each other, and it’s not equity.
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Negative savings. If you treat savings as a set of accounts, than any outflow is negative and your gross savings decreases.
If your gross savings is in fact negative, then your overall savings for the year is also negative.
Having targeted accounts for specific annual expenses is good, but doesn’t leave you with more money at the end of the year
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I agree with everyone above: income is something that is taxable. In this case, the only portion of the savings that can be considered income is the interest earned on it. This accountant has spoken! =D
I use Quicken to manage my net worth, but to manage savings I use one savings account and a spreadsheet that shows what’s in it. I use a rolling system of savings goals/targets to allocate my overall savings account into each defined goal. For the finance people out there, it’s a LIFO system (last in, first out).
Let’s say that I’m just starting out and my total savings is $1,000. I have an emergency fund target is $1,500 and I have no other goals at this time. My spreadsheet shows that I have $500 left on this goal to go.
But lets advance a couple of years. I now have $10,000 in my savings account and several goals:
(1) maintain $1,500 emergency fund,
(2) save $5,000 for my IRA, and
(3) save $8,000 to buy a new car.
Using rolling goals, I’ve already achieved (1) and (2), and I’m $3,500 deep into (3). When I move the $5,000 out of the savings account and into the IRA, my savings balance is now $5,000. I remove the IRA line, and the formulas show $1,500 in my emergency fund and $3,500 in my car fund. New goals are added and prioritized, and completed goals are either removed or shifted down to the bottom (for repetitive goals like yearly IRA contributions or property taxes). Since the emergency fund is the most important, it gets reduced last by shifts less priority funds into it.
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I mark it as “Transfer” so that it doesn’t show up as income. Example: I have a checking account and a savings account (simplified scenario). If I transfer something from checking to savings (for a future vacation or emergency fund), I mark it as transfer. That’s in Quicken. Excel knows what each category (vaction, emergency fund, car insurance, etc) in my savings account has in it.
If I transfer something from savings to checking (to pull money out of an emergency fund for a furnace), there are 2 transactions:
1) One in my checking marked house maintenance where I paid the man.
2) A transfer from savings (emergency fund) to checking which is labeled Transfer in Quicken.
That way, it all washes out.
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I use Mint to track my finances. Frequently, I use the code “Exclude from Mint” on items that have already been tracked as income or an expense. As an example, I link my credit cards to Mint, so the transactions are categorized appropriately, but if I were to allow the monthly payoff of my credit card to track on Mint then it would look as if I spent the money twice. I think it is crucial that you only track the money when it first comes in and when it last leaves your possession. Any transfers between accounts in the mean time should be ignored (you only really care about the balances of those accounts anyways, so if your savings balance increases month after month then you are doing well!).
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That was technical? Here’s one. Am i better off putting my kids college savings into my Roth and just pull it out if they need it. Or do i just open up an ETF?
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Putting college funding into Roths is exactly what my husband and I have chosen to do. We really can’t see a reason to do anything else. We’re assuming (but we really have NO idea) that if our financial situation takes a turn for the worse and our kids end up needing financial aid, the Roths will count less heavily against us in terms of savings. Also, money in Roths can be used by us virtually without stipulation while 529 money has all kinds of exceptions.
That’s our thought anway, but I’d love to see a discussion of this topic. We could be way off base.
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Negative savings… except for the interest earned while the money was in savings. Interest is INCOME!
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i think it is a delayed expense when you withdraw from targeted savings. targeted savings are a way to distribute irregular and infrequent expenses onto a regular and steady income. i would consider the money spent as soon as it enters a targeted savings account. the actual date you use the money is not important. It is allready budgeted to be spent. if you put too much or too little money into these targeted savings accounts then maybe it gets tricky to keep track of it all.
money in your emergency fund is different. we all know that we will have emergencies, but we can not predict how much money we need or when. The goal is to keep enough in there at all times. To me an emergency fund is wealth. it is an asset. I do not plan to use it, ever. When an emergency arises, it is just an expense that i wasn’t prepared for. I will start to budget for that expense, and will get a new targeted savings account. And the money i took from the emergency fund will be put back, by additional saving in the months or years to come. To me an emergency fund withdrawal is a loan that needs to be payd back.
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I LOVE this question! I am technical and funny just like Julie and I handle tracking my finances by Excel as well. Here is how I handle this particular situation.
I have a small section of my spreadsheet labeled “Asset Contribution.” In this section I simply indicate how much I have transfered into or out of each of my asset categories EXCEPT chequeing (which is where everything goes by default) each month. So for example, if I did a $400 transfer into savings this month, but then transfered $1000 from savings into my stock portfolio, this section would look like:
Asset Contributions
Savings: -$600
Stock Portfolio: $1000
RRSP Contributions: $0
Total Asset contribution: $400
However, it’s imporant to keep in mind that this is a minor part of my overall scheme. My financial tracking system has two main parts.
1) An Income Statement where I track all income and expenses by month. This gives me a monthly net income number and helps me keep my spending in check.
2) A Total Assets Statement where I track the value of all of my financial assets at the end of each month (bank accounts, investment account, retirement accounts, GICs, etc) in order to track how my net worth is progressing each month. If you have debt, that would go here as well.
The little section on asset contribution is an add on at the bottom of my income statement that allows me to double check things and make sure they make sense more easily.
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For me, it’s negative savings that deduct themselves from my overall savings.
Example 1
———
Let’s say that in a month, you put 500 dollars from your checking to your savings account and take out 100 dollars for paying a bill that you created the savings account for:
Checking Account: $ -500
└ Savings: $ -500
└ Savings Deposits: $ -500
Savings Account: $ 400
├ Savings Deposits: $ 500
└ Savings Usage: $ -100
Expenses
└ Expense xyz: $ -100
Example 2
———
If you’re transferring that money back to the checking account to and pay the bill from there:
Checking Account: $ -500
│
├ Savings: $ -400
│ ├ Savings Deposits: $ -500
│ └ Expense Reimbursements: $ +100
│
└ Expenses: $ -100
└ Expense xyz: $ -100
Savings Account: $ 400
├ Savings Deposits: $ 500
└ Savings Usage: $ -100
Basically, you need to make up for the negative expense for the withdrawal – by adding a reimbursement on the account that receives the money from savings.
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Wow, that’s a lot of responses so my response is probably going to get buried all the way at the bottom. I say, it’s neither. What it is, is Transfers. That’s how Mint.com treats it. Create a category called Transfers and record the withdrawal as a negative transfer in savings, and a positive transfer in your checking or your credit card (wherever you incurred the expense). The expense will be recorded in the appropriate category (i.e. vacation), so all will be right at the end of the year.
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I have one brick and mortar checking and one online savings. Everything’s handled through my checking account. Bills, expenses, withdrawals are done through the checking account. When I know there will be money left over after everything is accounted for, it’s usually swept back into the savings. Not always. Banking lingo calls this a zero balance account.
When I anticipate other expenses, money is then pulled in or out of my savings account and treated as transfers. The savings account is an extension of the checking account, if you will. I’ve begun to use credit cards to get the cash back and just payoff the balance with a transfer payment. New money is always designed to come into checking first and is logged as income and any money transferred in or out of savings is treated as simply transfers. Of course, automatic transfers from checking to savings is already in place. Hybrid of the out of sight out of mind concept.
This system of treating money going in and out as transfers has worked well since it requires advance planning and helps to eliminate impulse purchases. Not always, though. Still human.
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I would definitely not consider an expenditure from savings to be income. I’m not sure I completely understand how Julie is tracking these things, but it looks like maybe she is entering savings contributions as expenses on her regular budget and then entering expenditures from savings as expenses, which is also not correct (that would be double-counting these expenses). I would suggest that Julie simply track her targeted savings accounts separately from her regular budget.
I, too, prefer Excel over budgeting software because I can customize it to do exactly what I want. For the sake of simplicity, I don’t track different accounts separately — I just track income and expenses, and the difference is savings. The year I bought a house, I made a large down-payment out of my savings and ended up with a negative balance for the year, but combined (over all the years I’ve been tracking my money), I still had positive savings.
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Sounds like there are lots of ways to account for expenses put into savings. Mine is pretty simple. I use QB so I record the amount of savings as though it were a bill I’ve paid. As you reconcile your account the paid bills showing up on the statement disappear from the next reconciliation, but the savings still show up. When I want to know how much I have in savings for say my property taxes which I pay every 6 months, I reconcile the account and select everyone of the outstanding transactions with the name “property tax”. QB tells me how much the transactions are. When I pull the money out of the account, to pay the biannual payment, I delete the all of the “property tax” account transactions, leaving the balance of my savings still in the account.
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I maintain two separate spreadsheets, one for my checking account, one for my savings account. When I transfer money to savings, that is a withdrawal (negative) on my checking spreadsheet and a deposit (positive) on my savings spreadsheet, and vice-versa. I like to see my cash flow to know where my money is going.
I prefer maintaining the two separate spreadsheets because I mainly look at my checking spreadsheet. This way, I only think of the money available in my checking account, I don’t see the $10,000 in my savings staring at me wanting to be spent
I also only have 1-4 transactions per month on the savings (generally deposits), and the rest of life goes through the checking account.
If you want to get really picky, for each month on the checking account I have two sub-spreadsheets, one for cashflow in the checking account, one to track all purchases made on my credit card. This helps me foreshadow how much I’ll have to budget to pay off the balance the following month.
My husband and I have joint everything, and we share the spreadsheets on Google Docs, so any purchases or other activity can be entered or changed by either one of us.
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You could try http://www.gnucash.org/. It’s a free open source double book accounting software. If you get it, you might want to get a 101 accounting software, but if you get that down, it’s great. I took one accounting class and it’s enough I can generally figure out what we do, basically there’s types of accounts and our money typically flows like so
Income -> Asset (Checking) account. There’s rules about positive/negatives
Then you do a bunch of spending
Asset -> Expenses (Again they offset so both positive). We actually have like 100 expense accounts, and they are heirarchical, so under auto we have insurance, gas, parts, etc).
We also end up with
Asset -> Liability (It’s actually a 3 way transaction where we track asset:escrow, expense:interest, and how much liability:principal we paid off)
Then we do -Asset (Checking) -> Asset (Amount owed) because my wife is always ordering stuff from Amazon and picking stuff up at Sams for her mom and grandma. We used to just tell them not to worry about it (Because we really didn’t care, and it wasn’t that much), but now we just tell them it’s $54.87 or whatever because they didn’t like that and we have exactly what it’s for.
Gnucash can run some reports too, but basically we always know where our money is. My wife enters in everything as it occurs, then double checks against the online statement and the paper one. We also always spend through a credit card so we can get our 2% cash back.
It might be overkill, but we always have a great idea of how much money we have and where it’s going. We don’t budget much though, so I don’t know how much that’d work for you. We just keep a high Free-Cash-Flow and always try to throw a lot at savings. But it’s worked for us for the last 9 years.
If you’re doing everything in Excel now, I think it might be worth trying. But I’d get a good idea of basic accounting and how the accounts flow, because it is a bit odd until you understand them.
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I use Excel to track our family finances, along with Yodlee MOneycenter (which is similar to Mint). I have several sheets in the excel spreadsheet, including one that tracks net worth on a monthly basis, a sheet where I also record all income/expenses on a daily basis, and a sheet to track spending against budgets on a monthly basis. It may be a bit complex for some, but I like the added level of detail (since 2008 I have also tracked networth on a daily basis, using the Yodlee totals as my basis, but that is probably more detailed than most people want — has helped me stay the course with dollar cost averaging during the downturn, though!). On the monthly net worth sheet I have lines for ALL our accounts and major assets. I update these based on the yodlee totals on the first day of the month. I have separate subcategories for cash accounts (essentially “savings”, credit accounts (including mortgage), and long-term investments (retirement, college savings, etc). I subtotal all of them so that on a month to month basis no matter what has happened with individual accounts I can see the overall trend for that category. In general, savings amounts go up monthly (though not always — sometimes I move funds from savings to investments), as do investment accounts, and credit accounts tend to go down as our mortgage principal amount drops with each payment. What I REALLY focus on is the net worth amount, which is the total of all these subcategories (cash accounts + investments – amounts owed). That is where you see the overall progress.
Sounds to me like Julie would benefit from adding a “net worth” line to her account summaries — easy to do once you have the basic information, using the simple formula outlined above.
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I have one brick and mortar checking and one online savings. They are both free accounts. Everything is handled through my checking account. Bills, expenses, withdrawals are done through the checking account. When I know there will be money left over after everything is accounted for, the balance is usually swept back into the savings. Banking lingo calls this a zero balance account.
When I anticipate other expenses, money is then pulled from my savings account to my checking account and treated as transfers. The savings account is an extension of the checking account, if you will. New money is always designed to come into checking first which is logged as income and any money transferred in or out of savings is treated as simply transfers. Of course, automatic transfers from checking to savings is already in place.
This system of treating money going in and out as transfers has worked very well since it keeps accounting simple. It also helps to eliminate impulse purchases. Impulse purchases are not entirely eliminated, though. If only…
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Hey, whatever works for you. But this seems like tooooo much “work” for us. We’re about to retire as “the millionaires next door” without spreadsheets, etc. I’ve been mostly a SAHM except when I HAD to work because of husband’s often unemployment (and then I wasn’t making much money) — his last unemployment was for 10 months & health insurance was $900/mo. and we ended up using about $30k out of retirement savings. We have savings. Because we always lived frugally. When the 4 kids were at home it was hand-to-mouth, without cable, cell phones, designer clothes, expensive vacations, eating out maybe twice a year, etc. After they were on their own we continued to live frugally ( I LOVE my 10 yr. old used truck!) and were able to save money and invest (last 15 yrs.) We never had a “budget.” Or savings plans. I didn’t have time for that extra work. We just never spent much money on “stuff” or a big house or new cars, etc. and the money we were able to “save” kept getting invested and grew. We took a real big hit with the crash but have come back by holding the course. If I’d had to do all this budgeting & spreadsheet stuff I would have bailed on that system anyway. If it works for you — GREAT!!! But there are other ways to have financial freedom, if you can’t (like me) deal with spreadsheets. (I hate math!!! And spreadsheets!)
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This is a rough question. We have a well respected 15 year-old web development business with over a dozen employees, a rental property, and our personal income, and we’ve had similar questions as to what to track. Here are some questions that really got us:
* Is education savings “savings”?
* What if my IRA value goes up or down?
* What we put a new roof on the rental property, is that “investment” or “expense”?
* What if we add a dishwasher to our rental property?
* What if we add a dishwasher to our house?
* Now that we have 4 kids, how can we even compare our “expenses” to expenses from 5 years ago in any sort of meaningful way? Child care, diapers, vacations, food.
What we settled on is instead of measuring INCOME and EXPENSE we now measure:
* Net Worth
* Value of specific investments
* Expenses in each category (i.e. groceries, dining, etc.)
We’ve recognized that some categories are out of our control (i.e. health care costs for the family. We find the best insurance we can but at the end of the day we really can’t control how often the 6 of us get sick. It just is what it is.), while others (take dining out for example and entertainment) are VERY MUCH in our control.
So our goal is to always maintain a positive net value growth. One amazing thing about this is with the recession we were forced to pay a LOT of attention to our investment portfolio and make sure we kept it balanced and be sure we were paying the lowest possible fees on it.
We also came to the conclusion that college savings for the kids is NOT an investment, even though it’s managed through Vanguard and we’ve “invested” in the stock market.
We don’t count our car or our possessions as part of our net worth as we can’t think of any scenarios where we’d likely sell them, and even if we did we imagine we’d get a LOT less than we imagine they’re worth for them (i.e. if we sold our car, because of where we live we’d need to buy another one, and with 4 kids we sort of *need* a mini-van or bigger, so even if we could get $10k by selling the car, I don’t see how we could buy a replacement for it for less than $8k.
*Most* things we do to our home are NOT investment. We did expand the attic, which added a beautiful open room and plenty of storage, but we spent $35,000 but feel it only increases the VALUE of our house by $15,000, so only a little less than half of that was an “investment”. This becomes REALLY clear when we look at net worth.
It’s also neat to see the rental property. Whenever we have to do something to it we ask ourselves if it will add value or let us increase rent? If so, it’s an investment and it will show up in the right places. If not it’s not an investment.
Vacation savings is NOT an investment.
Nor is money we put into our car, house, wardrobe, hobbies, etc.
Kids college savings isn’t an investment either. It’s not something we plan on using for our retirement, and in our mind the REASON we save is for retirement.
This isn’t to say that we don’t go on vacation or “invest” in the upkeep of our house (we just had it painted last year), but we don’t trick ourselves into believing those things are “investments” or “savings”. They’re expenses. But if they increase our net worth some way, then we’re more likely to do them…
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We have a savings account for every major spending category. We don’t mess around with ins and outs. It makes it very simple. Too many times I had spent the utility money on something other than utilities because all of my money was lumped together in one account. I set up an account for housing, transportation, medical/health, Dog!!!, insurance, vacation, christmas club, etc. I think I have 8 total. For an initial set up of an hour or so you can put your finances on auto pilot.
Brendan
http://www.themoneybeast.blogspot.com
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Savings isn’t income; you already collected that income somehow, you just happened to put it in a separate place to spend for later. I suppose the interest on savings is income, but it’s pretty small that I don’t feel the need to account for it.
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