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Where to save for expenses years away
Old 06-12-2018, 09:52 AM   #1
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Where to save for expenses years away

What recommendations do you guys have for a vehicle to save in for expenses farther in the future? For example, I just replaced my wife's car and don't expect to buy another vehicle for 5+ years away but would like to put a little bit of money aside per month for that eventuality. I can get 2% in the high yield checking account, but was looking at the schwab full market index ETF. Should I go with something more conservative? It needs to be commission free since I'll be adding to it on a monthly basis, and preferably schwab since I already have an account there.



Thanks!
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Old 06-12-2018, 10:09 AM   #2
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I just keep any large purchase items in the general fund... IOW, I do nothing special with my accounts, just have it in my head...
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Old 06-12-2018, 10:11 AM   #3
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I keep my large expense account in a HY savings account. The account isn't that large yet, but will probably include CD Ladders as it gets hopefully larger.
I keep this account separate from my investment assets as an aside.
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Old 06-12-2018, 10:21 AM   #4
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I just keep any large purchase items in the general fund... IOW, I do nothing special with my accounts, just have it in my head...
+1

In the past, every time I felt the need to "wall off" certain funds for targeted purposes and created separate accounts away from my main portfolio to do so, it cost me money. I'm better off keeping an AA in my main (and now only) account that prudently supports generating a cash flow for anticipated future expenses than setting those funds aside someplace else.

My one exception is that I do have a traditional checking account (with electronic bill paying services) for repetitive, close-in expenses.
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Old 06-12-2018, 11:05 AM   #5
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I keep it all in one pot, but I use a spreadsheet to track separate categories of savings.
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Old 06-12-2018, 11:08 AM   #6
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The issue isn't the tracking of the money (I have a ledger for that) but if I should invest it for an expense that far out to get a return on it or keep it in cash for that long.
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Old 06-12-2018, 11:55 AM   #7
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Any expense less than 5 years out goes into my high yield money market account.
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Old 06-12-2018, 12:29 PM   #8
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What do you use for expenses out more than 5?
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Old 06-12-2018, 12:33 PM   #9
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What do you use for expenses out more than 5?
I just use taxable for that which is 90% stocks right now. (I'm 52 so don't have access to tax deferred). My overall portfolio is 60/40 with most of my bonds sitting in my 401k.
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Old 06-12-2018, 12:38 PM   #10
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I keep things simple, those funds are in a high-yielding savings account. I might consider a CD if the expense is definitely a few years away.
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Old 06-12-2018, 01:02 PM   #11
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Just got this from Vanguard - a live online broadcast regarding asset allocation for different timeframes:

"Many consider asset allocation to be the most important factor in achieving one's investment goals. Finding the right asset allocation doesn't have to be difficult—you just need to pay attention to a few key considerations.

In this live webcast, Kahlilah Dowe of Vanguard Personal Advisor Services® and Kimberly Stockton of Vanguard Investment Strategy Group will discuss asset allocation in retirement. They'll talk about the key elements to consider when determining how to approach your asset allocation, such as your:

• Investing time horizon.
• Risk tolerance for investments.
• Financial goals.
• Available resources.Date: Thursday, June 14, 2018
Time: 7 p.m., Eastern time

Register now
You'll have a chance to submit questions for our panelists when you register and during the live event. They'll address as many questions as possible".

As for me, I don't worry about expenses 5 years out - we have a large amount sitting in HY savings, but that is because I expect being asked to fund a property flip in the next 6 months. We probably are holding about 5 times our regular cash security blanket amount. We don't really identify and separate money, other than the cash security blanket.
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Old 06-12-2018, 02:17 PM   #12
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This is another example of what Richard Thaler calls "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) It is a useful tool IMO but it is easy to overdo it.

Money is fungible. All of your money is your (sole) portfolio. Planning the liquidity of your portfolio to suit your expected spending that is really all that is needed. Money that is not needed for 5 or more years is probably best invested in equities. More near-in needs, say 3-5 years might be covered by very conservative equities or by fixed-income investments of some kind. Very near-in needs militate towards t-bills, CDs, and maybe a little bit in fully liquid money-markets. As an expected need moves nearer and nearer on the time horizon, its most suitable investment vehicle changes.
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Old 06-12-2018, 03:14 PM   #13
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What do you use for expenses out more than 5?
Series I Bonds
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Old 06-12-2018, 04:22 PM   #14
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This is another example of what Richard Thaler calls "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) It is a useful tool IMO but it is easy to overdo it.

Money is fungible. All of your money is your (sole) portfolio. Planning the liquidity of your portfolio to suit your expected spending that is really all that is needed. Money that is not needed for 5 or more years is probably best invested in equities. More near-in needs, say 3-5 years might be covered by very conservative equities or by fixed-income investments of some kind. Very near-in needs militate towards t-bills, CDs, and maybe a little bit in fully liquid money-markets. As an expected need moves nearer and nearer on the time horizon, its most suitable investment vehicle changes.
I use this approach in general (very similar to OldShooter's comments), to balance my needs for flexibility, liquidity, risk:

If possibly/likely needed in <5 yrs - MMA (I calculate the amount based on known/expected needs. It's currently ~4% of the portfolio).

I keep another pot for expenses the might be needed in 5-10 yrs in a ~50% equities portfolio (This is an arbitrary amount. I don't really have any 5-10 year needs identified at present. ~25% of my portfolio is currently in this easy to access, relatively stable bucket).

All the rest is considered for "growth" and is (for 10+ yrs needs) in a closer to ~65%+ equities portfolio. (This is currently ~70% of my portfolio).

Overall, my portfolio is ~60% equities, but I split it up in the hopes that I will have less volatility in those segments I might need to withdraw from in the nearer term.

As for replenishing/more directly to OP's original question, I budget an annual amount to add to the MMA, to account for changing needs and accumulate enough for any large, unexpected HC OOP expenses. If the MMA balance is more than needed, I transfer the excess into one of the other investment accounts so it's put to work.

Obviously, if I just kept it all together, and did the mental accounting thing, I could sell/rebalance when funds are needed and it would work out fine; I just like the "sleep at night" feeling the liquidity profile provides.

YMMV; both ways can work equally well.
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Old 06-12-2018, 05:18 PM   #15
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I don't do anything special- just keep my withdrawal rate low enough that I won't deplete the funds too much when one of these expenses comes up. An exception might be saving for something such as college tuition, when you have an idea of the timing and amount, but fortunately I'm done with that. I HAVE had friends keep their 16-year old's college tuition funds fully invested in the market and then had the market tank- not a pretty picture.
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Old 06-13-2018, 08:36 AM   #16
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Most of my stash is in tax-deferred, but I have a small Roth for the next HVAC or other household emergency, and a taxable account for my next auto, in 4-5 years. By walling them off in this way, I won’t need to bump my yearly withdrawal from the IRA, thus reducing the tax hit.
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Old 06-13-2018, 09:18 AM   #17
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This article is helping me work through this issue:


How to Build A Retirement Paycheck From Your Investments - The Retirement Manifesto
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Old 06-13-2018, 09:38 AM   #18
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How about buying a stock that you are going to earmark for that > If you are going to buy a Prius buy TM. If you want a new Ford-buy that. Not particularly safe stash but I think it would work ,maybe, most of the time.
Even when I have decided in my mind that I will sell something for a particular purpose-I get there and hate to spend it.
I did start a Penfed account to build a CD ladder . Only did it once, three CDs with different maturity rates. I hated the low rates and lockin . I need to commit to that again just to take money off the table.
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Old 06-13-2018, 10:03 AM   #19
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What do you use for expenses out more than 5?
I also use a savings account for large expenses, but if you want a better return, you could look at CDs or short term bond funds.
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Old 06-13-2018, 12:01 PM   #20
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We just bought a new vehicle. We used funds from our general AA accounts. Currently we are 70% stocks and 30% short term bonds and cash. The money came from the 30% funds. But as others have said, it was not earmarked.
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