Where to save for expenses years away

[IxianArafel]

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!

 

[Texas Proud]

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...

 

[Dtail]

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.

 

[youbet]

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.

 

[COcheesehead]

I keep it all in one pot, but I use a spreadsheet to track separate categories of savings.

 

[IxianArafel]

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.

 

[corn18]

Any expense less than 5 years out goes into my high yield money market account.

 

[IxianArafel]

What do you use for expenses out more than 5?

 

[corn18]

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.

 

[jollystomper]

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.

 

[calmloki]

Just got this from Vanguard - a live online broadcast regarding asset allocation for different timeframes:

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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:

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• Available resources.Date: Thursday, June 14, 2018
Time: 7 p.m., Eastern time

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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.

 

[OldShooter]

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.

 

[foxfirev5]

What do you use for expenses out more than 5?

Series I Bonds

 

[Nature Lover]

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.

 

[athena53]

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.

 

[HFWR]

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.

 

[SumDay]

This article is helping me work through this issue:


How to Build A Retirement Paycheck From Your Investments - The Retirement Manifesto

 

[lemming]

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.

 

[mrfeh]

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.

 

[flintnational]

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.

 

[IxianArafel]

Thanks everyone for the input. You've given me several good options to think about, and I especially like the Series I bonds. I haven't had much exposure to bonds at all.

 

[ERD50]

I don't see any reason to think of this as an expense that is say, 5 years out, such that you need a 5-year 'safe' investment.

We will have all sorts of recurring expenses like this. New roof, new HVAC, new appliance, etc. It's all just spending. Keep it invested at whatever AA you are comfortable with. Nothing special at all.

It would be different if say, you had an inflexible need for exactly $32,768 dollars in 5 years, and that's all the money you had to your name, and $35,720 wouldn't cut it. Then you need to compartmentalize it and keep it safe. But if you are living that close to the edge in retirement, you have other problems to address.

If we assume the market will go up (or at least stay even) for the long run, there's no reason to think that the odds are that it will be down when we need to make a large purchase. One does not follow the other. If we believe that the odds are against us in a 5 year time frame, then do we think that for 2 years, 10, 20 years? What's special about 5 years? And if we do, we should have all of our money in 'safe' investments.

Your AA is what 'splits the difference' - no need to break it down further that I can see. You either believe in your AA or you don't. It doesn't make sense to me to pretend you have two AA's - you don't.

-ERD50

 

[rayvt]

For a large expense like a new car, I like the pay-as-you-go approach.
Don't put away any money in some special place --- as several others have said. 1) money is fungible and 2) money for an expense that is 5+ years in the future should just be in your regular portfolio.

"pay-as-you-go" = buy the car with a 1.99% new car loan.

When we were looking for a car last year, I calculated that a $30,000 1.99% 60 month loan would cost a total of $1500 interest--spread out over 5 years. My wife said, "Pfft. That's almost free. The in-dash GPS option cost more than that."

FWIW: Had no trouble getting that 1.99% loan (via the dealer) at Capital One, when their web-site rate was 3.5%. It helps to have perfect credit.