Contingencies/Reserves... how do you plan for?

[RunningBum]

Do you guys buy the VMMXX separetly? I ask because VG assigned my default/settlement fund as VMFXX automatically that pays 1.69% https://investor.vanguard.com/mutual-funds/profile/VMFXX

While the yield is lower than VMMXX it also has a slightly better expense ratio too so prob about the same unless we're splitting hairs.

VMFXX is my default settlement fund. When it was yielding virtually nothing I'd transfer it out pretty quickly. Now that it's above my CapOne MM acct, I will transfer that over buy VMMXX. If the situation is the same in December, when my Penfed CDs mature I would buy this as well, though I will look around and may put some back in CDs if the rate is higher.

I have a vague recollection that I couldn't use VMMXX as my settlement fund, but I could well be mistaken.

 

[pb4uski]

VMMXX used to be my settlement fund, but at some point it changed to VMFXX. I would prefer that it be VMMXX but I don't think I can change it so I just do a transfer occasionally.

 

[REWahoo]

VMMXX used to be my settlement fund, but at some point it changed to VMFXX. I would prefer that it be VMMXX but I don't think I can change it so I just do a transfer occasionally.

Same here.

 

[Scuba]

We’re only 18 months into ER, but our plan is to wing it. We have a large discretionary budget every year between travel, entertainment, wine, gifts, charity, etc. So in a year that we have to spend a lot on a major unexpected expense, we’ll just cut down on some of these items unless market returns are really high. In that case we would likely just withdraw more than usual and carry on.

 

[Markola]

VMMXX used to be my settlement fund, but at some point it changed to VMFXX. I would prefer that it be VMMXX but I don't think I can change it so I just do a transfer occasionally.

This is a rookie but sincere question. I recently read John Bogle somewhere advising holding cash reserves in short term treasury funds vs. money markets. I think Warren Buffett said his wife’s future 10% inheritance that’s not in stocks will be in treasuries. In fact, VG Short Term Treasury Index (VSBSX) has an expense ratio that’s significantly lower and a yield that’s significantly higher than VMFXX. Is there a big problem with keeping cash reserves in MMs vs. VSBSX? More volatility and less convenience, such as no ability to write checks, perhaps? What am I missing?

 

[scrabbler1]

All exterior maintenance included in my HOA fee.

And since I've been on the board for over a decade I know if and when the above increases.

I live in a large co-op which has a healthy reserve fund itself so my share of any large expense it incurs (beyond the reserve fund) will be very small. My monthly maintenance payments pay for the day-to-day upkeep of the co-op.

That being said, my second-tier emergency fund includes about $40k in an intermediate-term muni bond fund. I don't like tying up any large sums of money somewhere earning zilch or nearly zilch. In this fund, I earn 2-2.5% mostly tax-free. This fund also has checkwriting privileges, making the money more quickly and easily accessible in a pinch.

 

[Rustic23]

I set up a money market act. as a sinking fund. We retired with a new home and all new appliances. This made calculating the annual/monthly payment to the sinking fund easier. I took the expected life of each item, Fridge, stove, dishwasher, washer dryer, A/C, floors, roof, car, water heaters and what I predicted their cost to be with a 4% inflation. That allowed me to figure how much I would need each year. For us it is about $22,000! That's a lot but a good portion of that is new car every four years, just because we want to. Also the roof was put in at 15 years and it could go longer. As it turns out a hail storm blew through and the roof will be replaced next week at 12 years. (it likes no cost to us) For now the sinking fund is fully funded. We have replaced dishwasher, washer, and dryer. We still add to the fund and it looks like we will move some of the money to a longer term account.

 

[USGrant1962]

VMMXX used to be my settlement fund, but at some point it changed to VMFXX. I would prefer that it be VMMXX but I don't think I can change it so I just do a transfer occasionally.

That change was due to a new SEC rule. Basically, retail MM funds like Prime may impose fees and gates (e.g., withdrawal restrictions if there is a run on the bank). Government funds (VMFXX) may not impose those - and SEC apparently requires that feature for settlement accounts. I would guess that is so the fund company cannot put a gate on a settlement fund and prevent payment for a trade.

https://investor.vanguard.com/mutual-funds/money-market-reform/

 

[RunningBum]

This is a rookie but sincere question. I recently read John Bogle somewhere advising holding cash reserves in short term treasury funds vs. money markets. I think Warren Buffett said his wife’s future 10% inheritance that’s not in stocks will be in treasuries. In fact, VG Short Term Treasury Index (VSBSX) has an expense ratio that’s significantly lower and a yield that’s significantly higher than VMFXX. Is there a big problem with keeping cash reserves in MMs vs. VSBSX? More volatility and less convenience, such as no ability to write checks, perhaps? What am I missing?

More volatility, I guess, for me. I don't see that the expense ration is significantly lower--0.07% to 0.11%. Yield is higher, but overall returns are mixed--Both VMMXX and VMFXX have done better in the 1 & 3 year timeframe, and VSBSX slightly ahead over 5 years. It's certainly an alternative to consider, but I'm not seeing anything that screams for me to buy it. Also, I think any liquidation of VSBSX would be a taxable event, which is just a bit of a pain for ready cash.

 

[GravitySucks]

House / auto repairs and car replacement are in the Fidelity RIP expense estimator but I don't move any money so I guess Ill go with wing it.
It's worked out ok so far. Had to replace a car. Had to gift some to a relative. Had to fix the house a few times. Think it's better to keep the money fully invested than to keep much cash.
Five years in and I'm much more relaxed about emergencies. Even if I have to get a replacement car way earlier than expected a new Camry isn't going to break the bank.

 

[brucethebroker]

I don't actually have a budget in retirement, although I watch my spending closely and record it to the penny. That seems good enough to keep me on track since I am a bit of a tightwad by nature. When I have had an unexpected big expense, usually I am not inspired to incur big discretionary expenses for a while.

So, I guess you could say that I have a buffer amount built in, that either goes to unexpected big expenses or if not, then it is available for bigger discretionary items.

The nice thing about retirement, is that I don't have to borrow money if I need a new roof or something. I just get it and then cut back until I am back on track. It's sort of like borrowing from myself, I suppose. In August of 2016 I had to buy an entire new HVAC system, except for the ductwork. I ended up spending no more than usual that year because I didn't feel like spending much on discretionary stuff for a while after that.

Excellent point.
I came across similar advice when researching retirement about a dozen years ago. The writer said that many frugal people worry too much about unexpected expenses during retirement. They have already been trained for decades to LBYM, and simply adjust discretionary spending during an expensive "repair/replacement" type year-perhaps less travel or waiting another year/s to replace a car. Our personal experience seems to back this up, also.

 

[Rustward]

We use sinking funds. It is not very precise, but we know about how long things last -- water heaters, automobiles, roofs, HVAC equipment, appliances, furniture, tech items such as audio/video stuff and computers/phones/tablets, etc. The monthly and/or yearly budget has items for these things and that money is reserved for those items. Sometimes that money is in the portfolio and other times it is in a "reserve" cash account.

We have realized that if you stay in one place long enough, almost everything except the bare bones will eventually need to be replaced.

 

[audreyh1]

This is a rookie but sincere question. I recently read John Bogle somewhere advising holding cash reserves in short term treasury funds vs. money markets. I think Warren Buffett said his wife’s future 10% inheritance that’s not in stocks will be in treasuries. In fact, VG Short Term Treasury Index (VSBSX) has an expense ratio that’s significantly lower and a yield that’s significantly higher than VMFXX. Is there a big problem with keeping cash reserves in MMs vs. VSBSX? More volatility and less convenience, such as no ability to write checks, perhaps? What am I missing?

Risk - backed by US Govt as in treasuries you don’t have to worry about default (unless the US Govt refuses to pay obligations in which case everything will crash).

 

[FIREd]

I put a set dollar amount in a HY savings account every month to cover future expenses such as home/car repairs, out-of-pocket healthcare costs, car replacement, etc...

 

[MikeD]

I would think that would be a no-brainer to move it from next to nothing to Vanguard Prime MM fund that currently yields 1.89%

I an not clear on this point: I think Vanguard charges 0.16% expenses on the Prime MM Fund. So I just would end up with 1.73% interest, right? It may be astonishingly simple but I am not sure.

Thanks,
Mike D.

 

[REWahoo]

I an not clear on this point: I think Vanguard charges 0.16% expenses on the Prime MM Fund. So I just would end up with 1.73% interest, right?

No, the current SEC yield on VMMXX is now 1.90%, which is net of the 0.16% expense number. Whoda thunk MM accounts would be paying almost 2% interest again?

It may be astonishingly simple

Yep.

 

[Kickernick]

We created a spending plan for our son's college tuition & buying cars that goes across multiple years. We also plotted out vacations on an annual basis. For home repairs, experts suggest budgeting between 1-3% of the value of your home.