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Where to incremental funds toward long term replacement items
Old 11-28-2008, 10:01 PM   #1
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Where to incremental funds toward long term replacement items

We all need to put money in reserve for major items that will need replacement many years in the future. For example I budget replacing my vehicle every 10 years. To ensure that money is there and not spent on something else, I set aside $250 per month with a goal of having $30K for the vehicle purchase in 10 years. Where is the best place to deposit those funds on a monthly basis. I assume the early funds maybe invested/deposited somewhere different then the later funds and the funds should be moved to a more conservative place over time or do you just put it all in MM or CD's?


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Old 11-28-2008, 10:33 PM   #2
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We don't budget for individual items anymore. I've figured out most of the infrequent recurring costs and they are now part of the budget. The money for the car, new roof, etc is piled in with everything else. Yes, if you've got a really big expense coming up (e.g. college costs) it probably makes sense to separate that into a low-risk bin (e.g. CD's or a MM fund). But once you take a look at all these expenses (new roof, appliance replacements, cars, house painting, etc) they add up to a fairly big pile and can be thought of as fairly regular occurrences, on average. If you set aside all the money you'd need to cover all of them in a low-growth safe account "just in case," you'd be forfeiting a lot of growth.

Here's a thread we did recently on some typical expenses. I still need to organize it. Rich in Tampa also started a thread similar to yours some time previous to that, here it is.

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Old 11-28-2008, 10:36 PM   #3
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I don't want to pay taxes on interest earned on a "car fund". That $30K could generate $1500 in income and cost me $500 in taxes. So I put all that kind of cash in my retirement accounts where I don't pay taxes annually on the dividends. I use GNMA, TIPS, short-term bond and intermediate term bond in my retirement accounts for these kinds of asset allocation.
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Old 11-28-2008, 10:39 PM   #4
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I think that is part of your cash flow planning.
You should plan you purchase for a car 1 - 2 years before you want to buy it.
Compute you cash flow needs and move the money into less risky investments in advance.
If you have several years of expense money in cash equivalents this should not be too much of a problem.
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Old 11-28-2008, 10:43 PM   #5
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I put money for various replacement items in a intermediate-term tax exempt MF.
42 y/o, married, retirement portfolio = 43 x annual expenses
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Old 11-29-2008, 01:35 PM   #6
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While I do budget for long-term replacement, I don't save for them in a separate account. So that money is essentially in my normal portfolio. It depends on the size of the expense compared to your portfolio, and how often you incur this kind of expense. Between roof, cars, a/c units (i'm in the desert), appliances, furniture, house painting, I figure these expenses will happen fairly steadily and randomly timed.

If you end up having $20k cash saved outside your normal portfolio all the time, then to me that's just an allocation to cash that isn't earning as much as equities. I'm able to sell some equities if necessary to cover the expenses. The budgeting ensures that the money will be there (within the 4% SWR for example) instead of spent on something else. If nothing breaks, then my SWR is lower than planned, I guess.

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