GETTING THE MOST OUT OF CASH COMMITMENTS
Keeping your budgets accurate
Budgeting and Cash Commitments is at best a guess of forward spending. How accurate it is depends on how you use Budgets Get Real. This is not a limitation with Budgets Get Real but rather it is inherent in all budgets - since no software can predict things it knows nothing about.
In using your budgets you should consider the following:
Budgets are at best a model of future income and spending.
You cannot get them exact - assuming you want to have a life and not spend an excessive amount of time entering & checking budgets.
You should account for all relevant expenses. What is relevant?
Suppose you have a $1000 warning limit on your credit card, (which has a $2000 credit limit) and you are below the $1000 warning limit. A $20 unbudgeted purchase will not be relevant. A $200 unbudgeted purchase may well be relevant - particularly if there are several similar transactions. This said, relevance is relative - If your credit card is spent to $1900, a $20 unbudgeted purchase now becomes very relevant.
Update your budgets to suit your finances
In the above example you need not worry so much about your account balances (if your credit card is spent to $1000 VS $1900). If it’s close to the limits you need to watch your balances closely and import account details frequently - at least every week. How often you need to update your budget will depend on your need to do so.
Always plan on having some safety in your accounts
This could be in the form of some unspent portion of your credit card limit or a minimum amount of cash in your bank accounts. The more you spend without a budget the greater this safety margin should be.
Real imported transaction data is the only way to know where you stand.
The more frequently you import the less likely you are going to be effected by errors in your budget and the finer your safety limits can be.
This is the major benefit of Budgets Get Real - in the speed of import and automatic categorisation.
Do not believe predictions too far into the future.
Treat these simply as a guide. Be happy to get a sensible estimate of the money you need to transfer for the next week. You can only make transfers between accounts now - so why worry about what may happen too far in the future?
If you want longer term predictions use the CashCurve.
Check that your budget is correct, and that all longer-term budget items have been entered. It’s more important to see you are going in the right direction - and setting achievable goals - rather than concentrating on small details. Make sure that you include for future payouts - like interest free loans - that can have large penalties if not paid in accordance with the contract.
Ensure you haven’t missed a budget item rather than sweating the amount.
It is well known that when administering a major project, it is more important not to forget an item from the budget than be too concerned about the exact amounts. Most times some estimates will be high while others will be low - the average generally being quite accurate. You will be surprised how often your best, informed guess is correct. Treat your finances in this same way for the greatest success and accuracy.
Review and refine your budgets.
Set some time aside every few months to compare your actual & budgeted expenditure.
How do I budget for loan payments?
Loans are excluded from the list of accounts used to consider cash flow and suggested transfers. This does not mean that loan payments are not considered - only that you cannot use them as a source of instant cash (unlike bank and credit card accounts).
Loan repayments consist of two components that MUST be considered separately. These are:
1. The interest paid and the fee component. These are paid from the nominated account to the bank. They are an expense i.e. they reduce your earned wealth. These are budgeted like all other expenses.
2. The principal repayment component of the loan. While usually paid from a nominated account they also reduce the outstanding balance of the loan. In effect they are a Transfer and don’t change your net wealth - they must be treated differently from Interest payments.
When you import a loan payment you must categorise that payment as both interest and principal repayment - otherwise your account balances will be wrong. Unfortunately, the interest component will usually be slightly different each time, so you will need to adjust this each time to suit.
With budgets you don’t necessarily need this degree of precision. You have two real options:
1. Simply budget the total loan payment (interest + principal) from the bank account paying the loan to the loan account. Because it is a budgeted transaction neither balance will be affected - however, you will have the correct expense in your bank account for determining its balances.
2. Create two budget entries - one for the interest component and the other for the principal repayment component. With this approach the exact interest and principal components will not be exact and may change weekly. If so, you may need to adjust the proportions every few months.
This method will give you a much more accurate indication of your wealth. It also means that when you compare Budgets vs. Actual transactions you will get a much better comparison, and your CashCurve will be far more realistic.
Loan principle repayments are budgeted for as transfers.
In the Budget Components view select Search: Transfers. You can access this screen through the Add Series link.
Summary will be (in part):
Create the entry under the loan account the payment is to be made to. Then within the transaction details nominate the bank account from which the funds will be paid (usually the account into which your salary is paid) and any other details.
Note that transfers do not appear in most reports - Income & Expense Reports (or Budgets vs. Actual that derive from these results).
