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Rules for which "bigger" expenses to save for?
Old 03-22-2020, 05:34 PM   #1
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Rules for which "bigger" expenses to save for?

In the past I've saved a portion of my income each month toward a lot of different budget categories to make sure I have enough when there is a big expense (tires, pet needs surgery, etc).

But thanks to a new job with a huge salary jump, I know have plenty of cash padding in my budget (and, of course, I'm dumping all of that into FIRE) which would allow me to take care of any big expenses as they happen easily.

So now I'm wondering if it'd be better to not portion my income as much as I have been or maybe just do it for those annual/semi-annual big hits? It seems like I'm sitting on a lot of cash I shouldn't be. At the same time, I could argue, for things like clothing, it's a nice gut check before I buy something (I won't buy it unless it's covered with what I have saved).

Examples (all based on the average of what I spent last year)
- $75 per month on our pet. Current surplus: $636.75
- $40 per month for electronics. Current surplus: $1,238.56
- $75 per month for car repairs. Current surplus: $2,165.07
- $234 per month on health stuff. Current surplus: $2,722.87 (not counting my FSA).
- $140 per month on clothing (embarrassingly). Current surplus: $351.10
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Old 03-22-2020, 05:52 PM   #2
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What I did was to maintain a buffer of X months of living expenses in a savings account. Anything above X months of living expenses went to investments, and if I fell below for whatever reason, I'd rebuild until I got back to X months.

I think for the most part I used X=4, which was the right balance for me between feeling safe and feeling the lost opportunity cost of investing that money, but everyone's situation and perspective varies, so X might be different for you and may vary over time.

I did regularly keep track of my spending so the 4 months did vary with my spending.

For me, the only thing I couldn't pay for out of that kind of buffer was a house, my kids' college, a car, or a severe medical issue. For my house, I had a mortgage. For my kids' college, I saved ahead of time in college savings accounts. I haven't had to buy a car in about 20 years for various reasons; if I had to buy I would have probably paid as much down as I could then finance the rest. For a severe medical issue, I relied on health insurance; disability insurance was a consideration but I chose to take the risk and self-insure.

Doing it the way you describe is just too "fiddly" for my tastes, plus for the smaller things it doesn't seem to really be necessary. IMNSHO and YMMV.
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Old 03-23-2020, 04:41 AM   #3
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Thank you! I like that approach a lot.

Quote:
Originally Posted by SecondCor521 View Post
What I did was to maintain a buffer of X months of living expenses in a savings account. Anything above X months of living expenses went to investments, and if I fell below for whatever reason, I'd rebuild until I got back to X months.

I think for the most part I used X=4, which was the right balance for me between feeling safe and feeling the lost opportunity cost of investing that money, but everyone's situation and perspective varies, so X might be different for you and may vary over time.

I did regularly keep track of my spending so the 4 months did vary with my spending.

For me, the only thing I couldn't pay for out of that kind of buffer was a house, my kids' college, a car, or a severe medical issue. For my house, I had a mortgage. For my kids' college, I saved ahead of time in college savings accounts. I haven't had to buy a car in about 20 years for various reasons; if I had to buy I would have probably paid as much down as I could then finance the rest. For a severe medical issue, I relied on health insurance; disability insurance was a consideration but I chose to take the risk and self-insure.

Doing it the way you describe is just too "fiddly" for my tastes, plus for the smaller things it doesn't seem to really be necessary. IMNSHO and YMMV.
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Old 03-23-2020, 10:31 AM   #4
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This is my large expense plan also. Has worked for me.
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Old 03-23-2020, 01:37 PM   #5
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I currently (in retirement) use the accrual method as you do to budget for "big expenses".

While working I did not do this. Instead I:

1. Only spent 50% of any raise I got. The other half was saved (I kept 6 months of expenses in cash, the rest was invested)
2. Saved / invested 100% of any bonus or "found money".

The 6 months of expenses was used for necessary purchases (pet health emergency, car repairs, replacement vehicle for clunkers that could not longer reasonably be fixed, irregular household repairs such as replacement appliances, etc).

By saving and never spending half of all raises I kept my spending levels low and only purchased a home worth half of what the bank said that I could purchase. This meant that I also had half the furniture, half the roof replacement expense, and half the routine maintenance expense. While my colleagues were buying 6 bedroom / 4 bathroom homes I had a small 3 bedroom 1.5 bath home. Always spending well below my means allowed me retire early.

Good for you for planning ahead and being wise with your income.
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Old 03-23-2020, 02:02 PM   #6
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When our income grew to where we were able to have a large savings rate, I set an arbitrary level for what I consider a "big" expense. that would impact our desired savings rate It varied, but at retirement the limit for "big" expenses in a month was $1000. No large expenses, half of that was invested and the other half went into the buffer for a future month which might have a large expense. For example, our auto insurance payment was about $700 twice a month, no big deal, I just pay it all at once as it was under the limit.

In planning for retirement I took a more conservative approach and, based on our historical spending pattern, estimated when big expenses would occur (such as replacing a large appliance) and their frequency, and building that into our cash buffer.

The other thing I did, which you might consider, based on your FIRE target. If you have any major, likely one-time expenses, do it soon before you FIRE. For example, we did a new roof, new driveway, and 2 complete bathroom renovations within the 4 years before I retired. Doing them while working lessens the odds we will have to deal with these big expenses in retirement.
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Old 03-23-2020, 05:48 PM   #7
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we do the monthly savings thing for categories like you described, but for some we decide a ceiling for when we consider them "filled" until we need to carve into that line item. Then we turn back on that item to refill it. However for annual budget/monthly budget planning we stoll use that monthly expense as the savings amount, not the zero (when its "full) ie. we don't necessarily think we have that money to spend somewhere else. We know worst case scenario we are filling each of these all the time. If for a few months we don't need to don it then we don't, but we don't want to ignore it at as ongoing expense. Some are never "full" like prop taxes on a prop we have. Expected bill divided by 12. That much a month is always set aside.
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Old 03-23-2020, 06:20 PM   #8
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Thanks (especially for the compliment/encouragement at the end)

I don't spend any of my raises at this point, it's all going to FIRE, which should significantly speed up my timeline.

We also bought a home well below what we "could have."

Quote:
Originally Posted by Live And Learn View Post
I currently (in retirement) use the accrual method as you do to budget for "big expenses".

While working I did not do this. Instead I:

1. Only spent 50% of any raise I got. The other half was saved (I kept 6 months of expenses in cash, the rest was invested)
2. Saved / invested 100% of any bonus or "found money".

The 6 months of expenses was used for necessary purchases (pet health emergency, car repairs, replacement vehicle for clunkers that could not longer reasonably be fixed, irregular household repairs such as replacement appliances, etc).

By saving and never spending half of all raises I kept my spending levels low and only purchased a home worth half of what the bank said that I could purchase. This meant that I also had half the furniture, half the roof replacement expense, and half the routine maintenance expense. While my colleagues were buying 6 bedroom / 4 bathroom homes I had a small 3 bedroom 1.5 bath home. Always spending well below my means allowed me retire early.

Good for you for planning ahead and being wise with your income.
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Old 03-24-2020, 10:19 AM   #9
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OP, as a young guy I did the same approach as you. Car was a big item as I did not want to go in debt for cars. So I paid a "car payment" to myself so I could buy them for cash. Did the same thing with car repairs, property taxes and other bills. I also did the x month living expenses saving.

As my nestegg grew, comprised of both stocks and bonds, I began to feel comfortble with less of my savings in MM or St bond, as I did not want to keep that much money out of the market, in effect, for my entire work career. People have differing viewpoints on this. Everything is a comparison of risk to reward.

If you have existing non-mortgage debt I recommend you pay that off first. I do not recommend maintaining debt while building a cash reserve which is supposed to allow you to avoid debt.

FYI, hope this helps.
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Old 03-24-2020, 10:23 AM   #10
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Thanks so much! That makes a lot of sense.

Quote:
Originally Posted by Montecfo View Post
OP, as a young guy I did the same approach as you. Car was a big item as I did not want to go in debt for cars. So I paid a "car payment" to myself so I could buy them for cash. Did the same thing with car repairs, property taxes and other bills. I also did the x month living expenses saving.

As my nestegg grew, comprised of both stocks and bonds, I began to feel comfortble with less of my savings in MM or St bond, as I did not want to keep that much money out of the market, in effect, for my entire work career. People have differing viewpoints on this. Everything is a comparison of risk to reward.

If you have existing non-mortgage debt I recommend you pay that off first. I do not recommend maintaining debt while building a cash reserve which is supposed to allow you to avoid debt.

FYI, hope this helps.
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Old 03-26-2020, 07:46 PM   #11
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I never "saved" for anything. If I wanted it I bought it. All while saving for everything of course.

Keep saving and investing, buy whatever it is you want that is "within your means" and have fun!
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Old 03-26-2020, 08:56 PM   #12
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Quote:
Originally Posted by RobbieB View Post
I never "saved" for anything. If I wanted it I bought it. All while saving for everything of course.

Keep saving and investing, buy whatever it is you want that is "within your means" and have fun!
This was us as well. We benefited from earnings that were a bit more than our desired spending, so never budgeted per se--until retirement when each year we set an amount that we can spend in the coming 12 months. Even now, when/if we run into big expenses (say 10K medical, or a hypothetical new car), we just pay out of the annual spending budget and reduce our travel spending accordingly.

I suppose if we decide on a new car that is a lot more expensive than our current civic and Fit were, we would just get a loan and amortize it over three years of spending.
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Old 03-27-2020, 04:48 AM   #13
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Just put all of this savings into your general investment pool but keep part of it in cash/mm for emergencies. Also, boost your overall savings rate for retirement.
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