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Save For Future Expenses Or Pay When Due?
Old 09-15-2015, 01:34 PM   #1
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Save For Future Expenses Or Pay When Due?

I've been debating setting aside funds in mulitple savings accounts on my Capital One 360 account to save for known future expenses. Things like tires, 12k motorcycle service, 60k service, whatever. I'd get .75% interest there.

I'm weighing that against investing the money now and just paying for each item when it comes up. I can't find a short term CD rate that'll get me .75%, so it seems either stocks or highest interest savings accounts are the way to go.

Or maybe it should all just be lumped into a emergency fund that gets replinished once something needs done?

Since the time frame on each are fairly short at a couple years out at most, and I could cover the expenses when they're due, I'm not sure what option is the best. My goal would be to make the money work as hard as I could until it needed to be spent.

Any suggestions?
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Old 09-15-2015, 02:03 PM   #2
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Personally, I keep the funds for short-term expenditures all lumped together and just replenish from income (still working). I'm still rebuilding my cash reserves due to an unexpected emergency but I basically keep $10-20K cash reserve. Anything over will go to investment/retirement.
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Old 09-15-2015, 02:09 PM   #3
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Quote:
Originally Posted by RetiredGypsy View Post
I've been debating setting aside funds in mulitple savings accounts on my Capital One 360 account to save for known future expenses. Things like tires, 12k motorcycle service, 60k service, whatever. I'd get .75% interest there.

I'm weighing that against investing the money now and just paying for each item when it comes up. I can't find a short term CD rate that'll get me .75%, so it seems either stocks or highest interest savings accounts are the way to go.

Or maybe it should all just be lumped into a emergency fund that gets replinished once something needs done?

Since the time frame on each are fairly short at a couple years out at most, and I could cover the expenses when they're due, I'm not sure what option is the best. My goal would be to make the money work as hard as I could until it needed to be spent.

Any suggestions?
There are high yield savings accounts paying 1.05%. You don't need a short term CD.
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Old 09-15-2015, 05:06 PM   #4
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Anything we'll spend in the next year or two comes out of our Discover Bank savings account. It pays 1.01% and has been hassle-free for the almost four years we've had it.

Big purchase? Just 30 seconds to transfer the funds from Discover to the checking account and you're done.
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Old 09-15-2015, 05:41 PM   #5
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We never designate, nor particularly think about "amortized" expenses (car replacement, home repairs, etc.) We just keep enough cash in the checking account to cover most credit card bills for emergency replacements/repairs, etc. Big stuff (like cars) are not so big when you buy 10 year old cars, so the check book can cover them when needed. If not, it takes only a couple of days to transfer funds from various accounts (e.g., vanguard.) YMMV
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Old 09-15-2015, 05:57 PM   #6
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I do not set aside funds for anything. I have a solid investment account and spend from there. I do charge everything, and pay the charges in full each month. With my card, I get 1.5% cash back on everything, and some categories even higher. That is better than any savings account.

Tires, 12k motorcycle service, 60k service sound like normal maintenance. They are not emergency fund items. No more than a weekly trip to the grocery store would be. An emergency fund item is something you cannot predict.

Many of these maintenance items you can do yourself if you want to save a lot of money. I would not let .75% in interest sway me one way or the other.
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Old 09-15-2015, 06:45 PM   #7
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I have a handful of accounts within Ally Bank for known future expenses -- it's part of my overall budgeting mentality. When I look at my savings balance, I view that as my "true" savings amount 'coz I already have a couple of designated accounts for major expenses.
Intellectually, I know that it's just keeping money in a few pockets versus one, but emotionally I like having those set-aside accounts. I get a feeling you're of a similar ilk.
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Old 09-15-2015, 09:21 PM   #8
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I keep enough in money market for major purchase (for example, when I needed to replace old, used car). The rest, I keep enough budgeted in checking account each year. For such things as auto or household repairs. in otherwords, no. I don't have a special savings account set up.
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Old 09-15-2015, 11:11 PM   #9
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I've got over $100k accrued for regular and irregular expenses. It's been at that level for years, and probably will be throughout retirement as well. Given that many expenditures will come from this many different times, I just reserve the amount on paper but keep it invested with my normal AA. No need to hang on to $100k in cash for 40 years.
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Old 09-15-2015, 11:21 PM   #10
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Funeral expenses? They are only required when you die and I don't intend to do that. YMMV.
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Old 09-16-2015, 08:30 AM   #11
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Seems a little complicated to designate as such. We simply keep a fairly large cash balance in our savings account and transfer to/from checking as required. Out divs are "lumpy" by month so this is a necessity to smooth things out. Obviously expenses can be lumpy too so I try to time them to match the divs if possible.
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Old 09-16-2015, 08:50 AM   #12
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We keep a large enough balance in the checking account that we can just write the "bigger" checks as they come up. Then, we replenish the checking account periodically with IRA withdrawals. "Periodically" is less than monthly, and varies by actual, lumpy spending.

Once in a while, we have an expense (say wedding gift for kids) that's big enough that we have to withdraw before we write the check.
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Old 09-16-2015, 08:53 AM   #13
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I see little benefit in maintaining different accounts for specific future needs. I keep 2-3 month's "regular" spending in a Fidelity CMA. The rest of our cash allocation is at Ally earning 0.99%. This is enough for 2-3 year's regular and irregular expenditures. The rest stays invested until Ally falls below a certain threshold, at which point I sell something and rebalance if needed.

My expense planning spreadsheet includes specific large items we know about in the next 1-2 years. Right now, this includes a bathroom remodel later this year, an international cruise next year, and a new car in 2017. Beyond that, we have a budget category for large non-recurring expenses. It's $15K/yr, which is the average of the last 10 years actual spending on such items. We know that some years will be much higher than that and others much lower, but the long-term average should fall in line with that figure. The 10-year average has been trending down, so we'll adjust as needed going forward. Most smaller items like new tires or a new washing machine are covered in the normal car and home maintenance budgets.

I'm only 2 years into ER, so this is an area that does make me a bit nervous still, especially with our desire to travel and make some home improvements early on. For me however, as long as I can clearly see it in a spreadsheet, and everything makes sense, I see little benefit in maintaining a bunch of different bank accounts.
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Old 09-16-2015, 04:04 PM   #14
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I can see having an accrual account being handy if you have a fixed income stream and would like to set some aside else it would get spent, sending you into the credit card penalty box.
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Old 09-16-2015, 06:15 PM   #15
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Quote:
Originally Posted by RetiredGypsy View Post
I've been debating setting aside funds in mulitple savings accounts on my Capital One 360 account to save for known future expenses. Things like tires, 12k motorcycle service, 60k service, whatever. I'd get .75% interest there.

I'm weighing that against investing the money now and just paying for each item when it comes up. I can't find a short term CD rate that'll get me .75%, so it seems either stocks or highest interest savings accounts are the way to go.

Or maybe it should all just be lumped into a emergency fund that gets replinished once something needs done?

Since the time frame on each are fairly short at a couple years out at most, and I could cover the expenses when they're due, I'm not sure what option is the best. My goal would be to make the money work as hard as I could until it needed to be spent.

Any suggestions?
I just use cash for expenses of this size, with that short of a timeframe. Sounds like you are getting a reasonable interest rate at the bank given the circumstances.

The type of car/motorcycle maintenance expenses you mentioned aren't very costly, and your timeframe is short. Expenses like this come up all the time, several times a year. So, I don't see that keeping the money in cash would be too detrimental. If you don't spend it on tires, you might need a root canal. I know, I'm just too cheery, right?
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Seems a little complicated to designate as such. We simply keep a fairly large cash balance in our savings account and transfer to/from checking as required.
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Old 09-16-2015, 08:08 PM   #16
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When I started out doing commercial real estate appraising, Texas was down the tubes, and discounted cash flows was the primary method of arriving at a value. In order to do this we would build spread sheets and include expenses for apartments like roof replacement, interior refurbish and such.

When I was doing our retirement planing I figured out as many of these things as I could. It was made easier as we had a new house, and shortly after retiring we replaced the car. Our living expenses came in at about $52,000 a year. With allowance for replacements the number is $72,000 a year.

I also looked at what would be needed if everything broke in the same year. That number is about $100,000. Different things wear out on a different time table. Example: a car may be 10 years, and a roof 15 to 20.

Ten years into retirement we have enough in savings to cover everything. I still add to the account, just in case I have screwed up inflation.

It's only separate because it has come out of the IRA, thanks to RMD. Because there is not a surplus in the account, I also feel like we an spend it on something else if we wanted.
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Old 09-16-2015, 08:23 PM   #17
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Quote:
Originally Posted by RetiredGypsy View Post
I've been debating setting aside funds in mulitple savings accounts on my Capital One 360 account to save for known future expenses. Things like tires, 12k motorcycle service, 60k service, whatever. I'd get .75% interest there.

I'm weighing that against investing the money now and just paying for each item when it comes up. I can't find a short term CD rate that'll get me .75%, so it seems either stocks or highest interest savings accounts are the way to go.

Or maybe it should all just be lumped into a emergency fund that gets replinished once something needs done?

Since the time frame on each are fairly short at a couple years out at most, and I could cover the expenses when they're due, I'm not sure what option is the best. My goal would be to make the money work as hard as I could until it needed to be spent.

Any suggestions?
1st... synchrony bank high yield savings 1.05% ... check others too.
ok... not great yield... but better than you were quoting.

2nd... should have some liquid $ for emergencies, or pulling from during a down market..

Other terminology.. have you near term bucket ... safe money that pays near term expenses... emergency, repairs, living ...etc. I don't think you need to segregate all these expenses into separate accounts.
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