How do you separate for money?

Question

So we all know we should be separating money out for things like Vacancy/Maintenance/CapX/PM but I've never heard anyone discuss what system they use for monitoring their funds.

What do you do??

Seperate bank accounts?

A spreadsheet which gets modified as expenses come up but only use one account?

Something else?

Thanks for the responses.

Johann Jells · Answer

Honestly Account Closed, if I had your spreadsheet chops I wouldn't use Quicken either! They've been actively destroying it's utility since Intuit spun it off. I've given up on the automatic transaction downloads. I just opened a new bank account, and download failed. When I tried tech support they gave me a cock and bull story about my file being damaged and I needed to pay them to restore it and for patches to the newly installed version of Quicken! I told them to get stuffed.

Sadly, there's no product on the market that is simply a great Income/Expense ledger the way Quicken originally was, they all want to build a money management empire from you. The online ones will not import transactions, leaving you unable to reference or analyze your older data.

Andrew B. · Answer

You should keep reserve funds in a separate account, saved for that rainy day. You DO NOT need to keep the funds separated by reserve, capex, etc. Those distinctions are only for analysis purposes to ensure you make money at the end of the day.

Johann Jells · Answer

You must have set that up a very long time ago! I've been using Quicken since around 1990. You should see if you can import the CSV file the banks make available, it's much easier than manually copying. I used to have to do that before banks recently made it easier to download transactions older than 90 days and I'd neglected it. I'm not as disciplined as you!

As for accounts, money is money no matter where it is. I have one checking account for the property biz, and an interest account for my reserve fund.

Simon W. · Answer

As an accountant and a consultant, you do not actually separate money for vacancy, maintenance, and capex. You have to keep track by reviewing your financials.

Account Closed · Answer

@Johann Jells

Spreadsheets (Microsoft Excel or Apache OpenOffice [free]) are quite easy to set up, at least the basic functions are.  You can learn how to take advantage of advanced functionality as you need it, similar to adding another wing to the motel as the need arises.

In business school, I learned the fundamental equation of cashflow management:  BEGIN + PUT - TAKE = END

• BEGIN is your starting balance in your checking account every month.
• PUT is the amount of money you add to your checking account every month through deposits.
• TAKE is the amount of money you remove from you checking account every month through withdrawals.
• END is the ending balance in you checking account every month (and the BEGIN balance for next month).

To follow your expenses without having to count every penny you spend (popular in the day when cash was used rather than plastic), simply apply some high school algebra:  TAKE = BEGIN + PUT - END

We know our BEGIN and END numbers from our monthly statements and for wage earners, only have a couple of PUT numbers every month when our paychecks are deposited.  The TAKE number is easily calculated.  You might allocate some of the pennies to the wrong expense category this way, but at least you will be vaguely right rather than precisely wrong.  The big advantage of this approach is you don't have to remember where you spent every penny.  Also, most of our major expenses are made with checks or credit cards (or today with the ACH billpay feature), so they're easier to identify which expense category they belong in.

The other advantage is comparisons, such as this year versus last year.  You can also project your household budget (or any budget) out into the future once you set up the first couple of months.  The COPY-PASTE functions of user interfaces make spreadsheet creation straight forward.  It's also easier than using the paper and calculator approach.  With spreadsheets, I can change one number (unexpected emergency expense) and have the impact felt throughout my life instantly.  I ended up creating the "contingency expense" item where I budgeted $100 a month or so just in case.  Whatever I don't use, I send to a savings or investment account as "free money" to use later if a major expense does need to be covered.

Account Closed · Answer

I'll have to check out Quicken.  I use TurboTax and in some years, I was offered the starter version of Quicken for free as a thank you gift.  I never took the offer because I would not want to get locked into something I could not get out of if I ever had to.

One advantage of a spreadsheet is I can set up what-if scenarios to my liking.  For example, 25 years ago, I simulated the long-term impact of investing an additional $100 a month (or whatever).  I went ahead and did it because I was confident of the long-term impact this small amount of monthly money would have (many thousands of dollars) at retirement.  Today, this approach is known as saving $3 a day by not buying a cup of fancy coffee and investing the money instead to have much more money to enjoy at retirement.  Delayed gratification has its rewards because it creates "free money" to use more productively elsewhere.

I can also set up ratios to watch.  When I was working, I monitored how many months of living expenses my checking account would cover (my "cash cushion").  Today, I monitor how many years my investments will cover my living expenses.  From a well-diversified portfolio of asset classes (the asset allocation strategy), I want to have at least 25 years of expense coverage (the 4% safe withdrawal rate), although 33 1/3 years of coverage provides a better safety margin (the 3% SWR).  With absolute addressing, I can change the inflation rate I want to use for my future projections and have the change ripple throughout the spreadsheet instantly.  Currently, I use 4% as my postulated personal rate of inflation (and 8% for my personal rate of health care inflation) because if I can survive that level of inflation, I can survive a lower rate of inflation even better.

I enjoy the IF-THEN-ELSE function of spreadsheets for strategy simulations.  For example, in the 1990s, I got involved briefly with an investment group promoting Arizona real estate to California residents.  The group used the ReFi-until-you-die approach.  I simulated investing $100K with a 5% down payment (the group's numbers).  Once the available home equity exceeded $10K through home price appreciation, I would do a $5K cashout refi and buy a second property.  Lather.  Rinse.  Repeat.  After a few years, I was a millionaire and after a few decades, a billionaire.  After all, home prices only go up and never go down, right?  I ended up owning so many homes in this simulation, I decided to track my share of the U.S. housing stock just for fun.  At that point, I realized if this approach really worked and I could own 10% or 20% (or whatever) of the U.S. homes, other people would probably already be doing it.

Account Closed · Answer

As a household, I keep my reserve (set-aside) funds in a savings account ACH-linked to my checking account.  I do this as a convenience and as a rule I have in place to protect myself from myself.  Each account has its own target balance I want to maintain, consisting of so many months of working capital in checking and an amount of cash to handle contingencies tucked away in savings.  At a glance, I can verify my working capital cash and contingency reserves cash balances are on target.  If not, I have to take corrective action.

Another way to accomplish this same goal is to use a double-entry accounting system.  I prefer to use a spreadsheet, which includes the balances of all of my accounts (checking, savings, brokerage, retirement, loans, and so forth).  Once a month, I copy the income and balance information from my monthly statements to my household cashflow spreadsheet.  Some people do this with a software program (such as Mint or QuickBooks or whatever), but I started my spreadsheet before these programs existed and don't have a reason to change.

My spreadsheet also keeps a list by month of my expected expenses and I update these numbers as the expenses occur.  I can project my household budget years into the future by month this way.  Once set up, the spreadsheet is easy to maintain and I can calculate ratios and create graphs from the information.

Tom Kentop Jr · Answer

Wow, Thanks for all the answers guys. A lot of great incite and experience...

Exactly what I was hoping for! @Simon W. Account Closed

Jorge Roman · Answer

@Tom Kentop Jr

Check out the book Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine.

Pretty good insight on how, why and where to separate that cash!

How do you separate for money?

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