Tracking an unlinked loan from someone else
If you are interested in tracking a small or informal loan from someone else, for example, a friend or family member, then this is the guide for you.
This is particularly useful if there is no specific loan account associated with the debt, as you would have with a bank. In this guide, we will look at an example in which you have received a $1000 loan from someone else.
Our recommended approach
We recommend tracking these funds in your PocketSmith using the Assets and Debts feature on our Net Worth report (Reports > Net Worth).
Debts and Assets in PocketSmith differ from bank accounts in that they do not contain transactions, and their balance is updated either manually via the calendar or automatically by transfer budgets.
You can find more details here: Managing your assets and debts, but read on for the steps of tracking these loans!
Tracking a loan from someone else
Creating the debt
In this example, imagine you have borrowed $1,000 from a friend and were going to repay it at $100 per week.
- Head to the Net Worth (Reports > Net Worth) page
- Create a Debt called Loan from Friend with a current balance of $1,000, adding an interest rate if applicable. See: Add a debt to Net Worth
Tracking regular repayments as an expense
If the repayments are going to be regular, on a consistent schedule for the same amount each time, follow the steps below.
To track your repayments towards the loan, create the following categories:
- Loan Repayments (expense category) - assign any repayment transactions here
- Loan Repayments Credits (transfer category) - this category will be used to reduce the balance of the debt
- Loan from friend (transfer category) - this will be used to track the initial loan transaction from the friend (if there is one, if not, you can omit this category)
Set up an expense budget on the Loan Repayments category to match your regular repayments. Under 'Which account's forecast is this budget for?', select the account you’ll be making the repayments from.
In our example, we are repaying $100 per week:
Set up an income transfer budget for the Loan Repayments Credit category, reflecting the regular repayments. In our example, the budget is created reflecting $100 paid weekly towards the loan, less any interest (if any).
The income transfer budget for your Loan Repayment Credits category automatically reduces the balance of this debt, showing that you're paying off this loan! 🎉
When creating the transfer budget for a debt on your Loan Repayment Credits transfer category, the budgeted amount should be set to the principal portion of your loan. That is, your repayment amount less any interest.
Under 'Which account's forecast is this budget for?', select your debt. This will ensure that the transfer budget automatically reduces the debt balance by the budgeted amount each budget period.
Under 'This is a transfer from', leave this blank with no account selected. This should be blank blank as there is already an expense budget for the Loan repayment expense category, reflecting the repayment leaving your bank account.
This transfer budget would be an expense from the bank account that makes these repayments to the Debt, as you would be reducing the Debt balance:
The transfer budget will automatically adjust the debt balance accordingly:
Tracking irregular repayments
If the repayments are going to be irregular, follow the steps below:
- Create a category for the repayments called Loan Repayments.
- Use the Calendar to manually update the value of the Debt each time you make a repayment, or if you borrow more money.
Check out the steps for this here: Updating the value of a debt from the Calendar page
On the Calendar, navigate to the date you want to show this change in value and change the balance on that exact date. The historical balances will be left untouched.
Categorising transactions associated with a loan from someone else
If you’ve loaned funds from someone else, it’s best to treat the related transactions as follows:
- Assign any income transactions representing the initial amount loaned to you to a separate transfer category, e.g., Loan from friend.
- Assign any expense transactions repaying the loan to the Loan Repayments category associated with the debt.
- If you’ve used the borrowed funds to pay for an expense, then treat the initial expense transaction as a transfer. This may seem counterintuitive, but ensures you don’t double count the expense - as the repayments for the loan are treated as an expense.
Example
If you loan $1000 from your friend to pay an emergency vet bill, you would:
- Treat any initial credit transactions, reflecting the loan, as a transfer, assigning them to your Loan from friend transfer category
- Then, when paying the vet bill, you would also treat this as a transfer, assigning it to the same Loan from friend transfer category
- When repaying the loan, treat these transactions as an expense, assigning them to your Loan repayments expense category
Note: If your friend paid the vet directly for you, you won’t have the two initial transactions showing in your PocketSmith (loan credit and vet bill payment). You can still create the debt, and treat the loan repayments as expenses 🙌