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Old 02-26-2008, 09:53 AM   #21
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We have a very large cash position (currently earning 7%) - 45% of our portfolio is cash - so we don't have to worry about unexpected large purchases.
Let me ask the obvious. How are you earning 7% in cash?
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Old 02-26-2008, 10:00 AM   #22
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This may be more than you ask. We keep about four times our annual cash needs in a money market. I figure it keeps us from the ups and downs of the market and at the same time would serve as an emergency fund.

I also put in a sinking fund figure in my spread sheet to cover replacement of :roof, Wash/dryer, Sprinkler, Mower, Lawn Tools, A/C,Water Softener, Kitchen Apply, Dishwasher, Stove, Frig, Paint, Carpet, Furniture
That comes to $4,500 a year. So when I do my annual budgets this number is in there.
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Old 02-26-2008, 10:33 AM   #23
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I keep a MM fund with 1 to 3 years in living expenses outside our retirement portfolio. This is kind of like a "bucket" that helps us ignore short term volatility in our longer term investments (i.e. the retirement portfolio),

but it ALSO means we always have cash on hand to cover vehicle purchases, major repairs, etc.

Only once did we do an additional draw on the retirement fund, and that was to help cover our motorhome purchase. We often laugh looking back at this "imprudent" step that supposedly reduced our potential annual income, because the retirement fund has increased well over 25% since that large withdrawal! Heck, it's almost as if buying the motorhome caused our retirement fund to go up big time! LOL!

I thought you were doing the bucket thing, Rich, so I don't see why bucket 1 shouldn't cover short term large ticket cash needs.

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Old 02-26-2008, 10:39 AM   #24
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I thought you were doing the bucket thing, Rich, so I don't see why bucket 1 shouldn't cover short term large ticket cash needs.
I'm sure it could, though I think it would be simpler to do what you're doing from the get-go (an extra bundle to the side, set it and forget it til needed).

The whole thing needn't get very complicated, but it is interesting how differently people address it.
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Old 02-26-2008, 11:21 AM   #25
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combination of money market reserves, CD ladder, and just in case.......HELOC
which hopefully will never have to be use........but no cost to obtain or maintain
unless you use it.
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Old 02-26-2008, 11:55 AM   #26
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Rich,

This is a timely subject for me. Right now I just have a big chunk in VG & Fido
MMF's while I try to figure it out. But I want to move a lot of it into ETF's and MF over the next few months. This thread has some good ideas. I particularly like the idea of annually or monthly accruing into a fund to be used for special big items. Somehow that would just feel better when it is time to write the check.Maybe I could go ahead and fund the big ticket account for the known big ticket expenses, and then just add an inflation factor each year until it gets a hit. After that, I could increase the funding, looking forward at expected life, and add that amount. At some point I could stop funding it due to simple life expectancy. We all gotta go sometime.
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Old 02-26-2008, 11:58 AM   #27
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I don't separate it either physically or accounting-wise. I do keep a minimum of about $35,000 cash in a taxable account. Also, since I practice cash flow investing, I have a lot of dividends and interest landing in the account every month, so that $35,000 which is close to a year's living expenses should see me through most things.


Ha

I do the same but I also take whatever money is left over at the end of the year from my 4% and add it to the fund.
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Old 02-26-2008, 12:34 PM   #28
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We have a very large cash position (currently earning 7%) - 45% of our portfolio is cash - so we don't have to worry about unexpected large purchases.
Similar approach for us but we don't earn close to 7%.
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Old 02-26-2008, 12:46 PM   #29
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I also have a good sized reserve fund. However, mine is sort of the bucket system too.

Bucket 1 is basic expenses amount for 2008.
Bucket 2 is roughly 4 year's expenses; mostly cash and some mutual funds.
Bucket 3 is retirement accounts. Won't touch until the appropriate age.

Any large (new roof or car sized) or unexpected expenses would be paid from Bucket 2. Bucket 1 has enough for all planned and known expenses for the current year including some slush.
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Old 02-26-2008, 01:10 PM   #30
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I do something similar to retire@40. I have separate funds for car replacement,car repair, home repairs, and one for appliances. I fund the car replacement and repairs with money DH is reimbursed for mileage; roughly $350 a month. Home repairs (a new roof this year) comes from his second career paycheck and the appliance account is funded with rolled coin, rebates, and ebay money. It is so interesting to see the different ways others handle this.
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Old 02-26-2008, 01:32 PM   #31
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when the roof and tires go i'm selling what's left of the house & what's left of the car and vagabonding for the rest of my life. problem solved.
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Old 02-26-2008, 02:46 PM   #32
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I plan to use an Asset Allocation strategy that has 4% cash which I will keep in a MMF. Dividends from the taxable account will also flow there.I'll work through that cash through the year. At the end of the year, I'll rebalance the entire portfolio to give me 4% cash for the next year.

If I need more cash for an emergency, I'll sell the best performing asset for the year to raise it. If equities are showing a loss, I'll sell ST bonds.

Probably needs some more tweaks, but I figure I have the rest of my life to work on that.

This modeled on my understanding of what Bob Clyatt says in his book.
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Old 02-26-2008, 07:57 PM   #33
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Let me ask the obvious. How are you earning 7% in cash?
We have money interested in Australia, our homeland. We are actually earning 7.25% on a term deposit which is the same as a CD. However it is possible to do better than that. Can get 7.70% at Rabobank for a 180 day deposit. Money we have in the UK is earning 5%. Worst rate of return for cash is in the US. However, on the other hand mortgage interest rates are a lot higher at these locations. It's possible to get 6%+ for monies that are deposited at call in Australia.

However I wouldn't recommend anyone transferring funds to Australia at the moment as with the US$ in the toilet you will be taking a total bath on the exchange rate.
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Old 02-26-2008, 07:59 PM   #34
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Actually I just double checked and you can get 8.05% at Raboplus.
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Old 02-27-2008, 01:35 AM   #35
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I have about 10% cash right now. It is split up into 5 different accounts (long story). We use the main credit union MM account for your "daily" expenses and if we run out we go to our Vanguard MM account. If that runs out we have another brokerage account with several CDs and index funds.

When we sold the cabin last year we took the profits and used them to upgrade the house kitchen, put a big down payment on a RV, did some custom upgrades to the house and the rest went into the MM or CDs.

We don't have a "bucket" with the name "Emergency Fund" on it. If I need the cash I do a wire transfer into my checking account and then write a check. The "need" is planned but I choose not to have individual accounts for only narrowly focused items.
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Old 02-27-2008, 04:47 AM   #36
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I have a cd, 2 savings accounts and an interest bearing checking account for emergency savings. I'm in the process of converting most of this cash to index funds. I'll probably leave 1 year of expenses in these cash accounts.
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Old 02-27-2008, 08:09 AM   #37
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I've got about 10% in VG Prime MM. Further, I've got a lot of old bonds which I consider good as cash. Should a real emergency show up, I should have it covered.
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Old 02-27-2008, 08:27 AM   #38
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i keep my spending down so i have savings, and i keep a money market emergency fund in the wings for instant cash. i also have a nice fat tax free muni bond fund (VWAHX) earning steady dividends, from which i have immediate check writing privileges. i plan to use this as an OMG big ticket item reserve. since the fund NAV doesn't change much, my capital gains hit if (when) i sell shares is minimal. in some cases, a loss.

if i were to sell my long term stock funds, i would not only take a captial gains hit but also miss out on any future growth. these are an absolute last resort for me.

i'm less than a year into the FIRE act, so the validity of my strategy is TBD. and my age is a huge factor in my approach, i.e. 49 and holding.

any comments from the expert FIRE folks?
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Old 02-27-2008, 09:43 AM   #39
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I accrue these expenses in my annual budget.

For example, if you estimate you will buy a car costing $30,000 every 10 years, then you would accrue $250 monthly ($30,000 / 120 months) just for that purchase.

I do this with all expected future purchases that have an effective life of more than one year such as the roof, boilers, washers and dryers, TVs, furniture, etc. I also accrue anticipated medical expenses such as future root canals and implants, and out of pocket medical.

This should be part of any budget for purposes of determining a SWR.
This approach makes the most sense to me. Having the funds in a taxable account- of a conservative nature (not 100% money market, but maybe 80% cash and 20% something else).

I think the issues here are
1) knowing the expenses and budgeting for them
2) starting this fund prior to retirement (so the well is not dry if everything craps out the day after FIRE)
3) the frequency of the expenses. 1 car every 10 years makes sense. What if that second car only lasts 5 years?
4) the inflation of the expenses. Maybe big ticket things have a different inflation than consumer goods.
5) accounting for as many less than annual expenses within spending (withdraw rate) as possible.
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Old 02-27-2008, 12:11 PM   #40
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I think the issues here are
1) knowing the expenses and budgeting for them
2) starting this fund prior to retirement (so the well is not dry if everything craps out the day after FIRE)
3) the frequency of the expenses. 1 car every 10 years makes sense. What if that second car only lasts 5 years?
4) the inflation of the expenses. Maybe big ticket things have a different inflation than consumer goods.
5) accounting for as many less than annual expenses within spending (withdraw rate) as possible.
This is one big guessing game, but it's better than not guessing.

True, you can budget for a car lasting 10 years based on past experience and it could turn out that it dies in 5. Well, it could die in 2 years, it could die in 12 years, but you have to take a guess based on something.

Inflation is a key personal number. Again, you have to project forward based on a set of assumptions.

You can always put a "miscellaneous" line items for a fudge factor if you think there may be something else that could come up not accounted for.
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