Hi there,

I was searching a solution for handling debts with friends in ynab. And I would share my thoughts here, probably it will help You.

If You think about debts You will find out that there are 2 types of them, regarding if You are the debitor or the creditor.

Type 1:
I lend money to somebody
example: I am in a restaurant with my friend. He has no money to pay his meal so he asks me if I can give him 20$ to pay the bill.

Type 2:
I borrow money off somebody
example: I am shopping with a friend and want to buy a new album of my favorite artist. Unfortunately I have no money with me so I ask my friend if he can give me 20$ for the cd.

How can this be done in YNAB ? In case 1 I have less money in my pocket than I can spent.
And in case 2 I have more money in my pocket than I can spent.

The easiest solution would be: Write the debts down on a paper and ignore them in YNAB.
This is because debts are 2 money transfers, which happens to different times. I give some money to my friend and one week later he (hopefully) will give it back to me. Or I borrow off my friend and next month I will pay them back. So all things are ok then.

The critical situation is the timeframe between both transactions, because the money is out of balance. I cannot make a reconcile in this phase because my spends differ from my accounts.

Solution with categories
My first solution was creating a new category in YNAB called „debts for peter“.  When I lend money to peter I put this in this category. But there was one problem: When my friend bought the cd for me there was no money transfer. How could I enter it in YNAB ? The solution was: You can split the action in two sub actions: My friend gives me 20$ and I buy the cd by myself.
The transactions in YNAB are:
Type: Transaction, Account: Cash, Category: debts for peter, value: +20$
Type: Transaction, Account: Cash, Category: music, value: -20$

One week later I give the money back to peter:
Type: Transaction, Account: Cash, Category: debts for peter, value: -20$

And the Type 1 case worked also in this way:
Type: Transaction, Account: Cash, Category: debts for peter, value: -20$
(because I do not spend anything there is only 1 Transaction)

One week later peter gives the money back to me
Type: Transaction, Account: Cash, Category: debts for peter, value: +20$

This worked well for me. But there was a better solution.

Solution with accounts
Instead of a category I created a debt-account. I choosed to make it an on budget account.

Why was this a better way ? Because on categories You should only having spends. But debts are in fact only money transactions (WHERE IS MY MONEY ?)

So the transfers in YNAB looks like:

Type: Transfer to account „debts for peter“, Account: cash,  Category: not needed, value: +20$
Now I can buy the cd because I have enough money:
Type: Transaction, Account: Cash, Category: music, value: -20$

One week later:
Type: Transfer to account „debts for peter“, Account: cash,  Category: not needed, value: -20$

If I take a look the my accounts I can easily see the debts for peter in red. Because it is an on budget account it affects my money directly: I have 20$ more than I can spent because the owner of the 20$ is peter and not me.

Conclusion:
In general You can use categories or accounts for handling debts. But accounts are better because categories are for spending purposes only.

One last thing:
This system works even if the transactions are swapped and You have different payees.
Example: You grandmother put 100$ on You bank account and say: Merry christmas, 50$ is for You and 50$ is for Your brother.

This is a type 2 debt because I owe my brother money. But the direction differs: First I get the money, than I give it to my brother. And I give the money to another person than the person from which I’ve got the money.

Lets take a look how this can be handled in YNAB: Because I split the money I will make a Split Transaction:

Payee: Granma, Category: Split, Value: 100$
Split1: Type: Transaction, Account: mybank,  Category: Income, value: +50$
Split2: Type: Transfer to account „Brother debts“, Account: mybank,  Category: Not needed,  value: +50$

Thanks for any feedback.
Greetings, Andy.