Rules for which "bigger" expenses to save for?

[lsimpson33]

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

 

[SecondCor521]

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.

 

[lsimpson33]

Thank you! I like that approach a lot.

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.

 

[TN Jim]

This is my large expense plan also. Has worked for me.

 

[Live And Learn]

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.

 

[jollystomper]

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.

 

[MrsHaloFIRE]

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.

 

[lsimpson33]

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."

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.

 

[Montecfo]

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.

 

[lsimpson33]

Thanks so much! That makes a lot of sense.

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.

 

[RobbieB]

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!

 

[2017ish]

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.

 

[DrRoy]

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.

 

[teetee]

I used to have detailed spending categories but it took too much energy to keep track. After I got used to not spending non essential items, now it is just housing, grocery, transportation, commuication, emergency and recreation.

Saving for a house and healthcare have become my large items. 400k for a house, 400k for future healthcare expense (surgery, long term care insurance, assisted living, etc). Though I have a goal, my unspent money (savings) still go into my portfolio.

 

[Katsmeow]

I use YNAB which as a lot of different options for these kinds of expenses. Anyway, what a lot of people doing budgeting do is that they put a "cap" on how much they allocate to a particular category. I personally have very detailed budgeting categories and have done so for years.

So YNAB has helped me thing about various categories and the different types. This may be helpful to you.

1. Everyday, fairly regular expenses. Something like groceries. It varies from month to month but I have expenses every month. This is a good category to budget an amount equal to 1/12 of your annual average spend on this. If it ends up being too much and you end up with surplus then you can reduce the monthly amount. Too little, then add to it.


2. Fixed Expenses. These are easy. You just need to remember to budget for the irregular ones as well as the regular ones. In general, I consider this to include expenses that I may not know the total exact number but know it fairly closely. So the mortgage is every month. Property tax is once a year. Other examples would be home insurance, auto insurance, health insurance. For those paid once a year (or less often than once a month) many people will again budget 1/12 of it each month.

3. Irregular expenses that are not all that large. An example would be things like household goods. New towels, or a new can opener, or printer ink. Another might be veterinary expenses. Or auto maintenance (not repairs just routine periodic maintenance).

For these expenses it helps to put a cap on the amount. For example, if you can't imagine spending more than $500 on that category in a year then once you have built up $500 in the category quit saving any more in it until the category dips down.

4. Big irregular expenses. These can be "rainy day" type expenses where bad stuff happens. Auto repair, home repair, medical expenses beyond just everyday stuff. These are hard to estimate. I find it is helpful to look at several years expenses on this. One year I had $6000 in auto repairs. The last two years I have had none. Another year I had well under a $1000 in home repairs, then there was the year we had several times that. Figure out an average over a period of years (adjusted by current circumstances) and save to that amount and then keep a balance. I actually determine amount for each type of expenses and then keep in one rainy day holding category to dole out as needed.

Also there are large irregular expenses for things that are more discretionary. Furniture may fit in here (sometimes it less discretionary) or a new TV or new computer. Some people set up separate categories for these kinds of things but you could keep it in one category.

5. Sinking fund stuff. This is for large expenses that are more long term. A new roof. A new car. Stuff that you may not need for years but it could happen tomorrow. Maybe new appliances. Again, look at replacement cost for stuff and then divide it out over the time before when you think you will need it.

6. Of course, for working people, an emergency fund is a good idea and should be funded before things like saving for a new TV.

 

[Dtail]

I fund into a separate account for large irregular expenses on a monthly basis. The account which is funded into is kept track of for the subcategories of expenses.
Details and such for me.

 

[Koolau]

I simply calculated about what I would need to live on and then declared myself Financially Independent when my portfolio would throw off that much (per year or per month) based on the 4% rule (actually, I think I used 3.5% to be conservative.) In any case, there is so much variability within specific categories of spending. I guess it's all the same with just a different way to get there. I just found it easier to lump the whole thing together rather than looking at individual categories. Not suggesting my way is better so YMMV.

 

[athena53]

It all depends on what works for your brain. My system would be too "fiddly" for most. I'm already retired and very comfortable. I use the "bucket" method you do, adding to them every month from my SS and pensions and draws from the investments. There's also a "general" bucket for everyday, relatively predictable expenses- the mortgage, groceries, utilities, smaller discretionary purchases, etc.

I like being able to draw down from the "Medical" bucket when the bill for the dental checkup comes in, or decide to buy a steam cleaner for the floor or a bunch of nursery plants and draw down the "home improvement" budget. Travel is way down this year so I'm stashing surpluses in a bucket earmarked for painting the house next year. If one account gets really high, I may stash the excess in another.

It's been working for me for a few decades now so I have no plans to change it!