How do You Replenish Your Reserve Funds

[CRLLS]

The other thread about Reserve/Contingency funds has resurrected a question that I have had but not seen answered before. If one uses these buckets for planned or unexpected large expenses, or for income during a Bear market, how/when does one replenish that fund. And how is it different from just using money from the one big investment bucket?

IOW, if one elects to have a smaller amount invested in exchange for the "safety" of low earning Reserve/Contingency fund buckets, The available income from the investments is obviously proportionately lower. Further, when/if the R/C bucket is called upon, even less money is available from the investments as the reserve/contingency gets refilled.

It would seem that the cost of having the R/C bucket is double fold. One reduces the possible income, the other reduces possible income as one funds/then replenishes it when used. Aren't both alternatives simply a wash?

 

[Golden sunsets]

Just our method. See below in red.

The other thread about Reserve/Contingency funds has resurrected a question that I have had but not seen answered before. If one uses these buckets for planned or unexpected large expenses, or for income during a Bear market, how/when does one replenish that fund. We add to this fund monthly. I maintain a spreadsheet with the approximate age of an item, the approximate cost to repair/replace and the number of months remaining before repair/replacement. So if my refrigerator is 10 years old and I think it may need replacement in 15 years and the cost is $10,000, then I should already have reserved $6,666 and need to put an additonal $55 per month into the fund. If we do this for each item we can think of then we have a fund for such items and even though individual expenditures will rarely equal the amount reserved for there is still a pile from which to fund the cost. Occaisionally I make sure the fund is generally in good shape. And how is it different from just using money from the one big investment bucket? I think its psychological as much as anything else, plus if I know when we are going to repair/replace a big ticket item, in the near future I don't want that money invested.

IOW, if one elects to have a smaller amount invested in exchange for the "safety" of low earning Reserve/Contingency fund buckets, The available income from the investments is obviously proportionately lower. Further, when/if the R/C bucket is called upon, even less money is available from the investments as the reserve/contingency gets refilled. True

It would seem that the cost of having the R/C bucket is double fold. One reduces the possible income, the other reduces possible income as one funds/then replenishes it when used. Aren't both alternatives simply a wash?To each his own. We do make sure that we have the fund in a HY savings. I wouldn't invest my emergency fund in the market, so I also would not invest my Sinking Fund in the Market.

 

[marko]

What we've found is that "it's always something"...we spend about the same amount on the unexpected every year; it's just something different each year. A new roof, driveway paving, new car, a larger than normal vacation, a big boat expense, new fridge/dishwasher, whatever.

We just set aside about "$X"K each year for lumpy expenses....something will turn up needing attention. Its part of the general money market fund we draw from annually, replenished by our dividends.

 

[Starsky]

IOW, if one elects to have a smaller amount invested in exchange for the "safety" of low earning Reserve/Contingency fund buckets, The available income from the investments is obviously proportionately lower. Further, when/if the R/C bucket is called upon, even less money is available from the investments as the reserve/contingency gets refilled.

It would seem that the cost of having the R/C bucket is double fold. One reduces the possible income, the other reduces possible income as one funds/then replenishes it when used. Aren't both alternatives simply a wash?

For us, the R/C bucket is our portion of the portfolio that earns the lowest return - typically CDs, PM and the stock in our brokerage account. There's always some portion of the portfolio in that category - simply for diversification - and plenty for any contingencies. It's relatively simple to decide how much to keep liquid and how to rebalance around the rest of the portfolio based on the economic/market situation at the moment. Unless you are extremely risk-tolerant, the "safety" of guaranteed lower returns is not a bug, it's a feature of the strategy [and our risk profile].

We usually just feed our savings account with deposits as required from our other investment accounts to keep the balance where we need it. In a good year, it's the equivalent of profit taking. In a down market, you can decide if the low stock return is worth holding onto or not versus cash.

It's all part of an overall draw-down strategy in retirement. At some point, hopefully way in the future, these accounts will be refilled with proceeds from liquidating or refinancing our rental real estate. It's hard [mentally] to dig into your long-term savings when you're not working and to watch them decline - even when you shouldn't be worried - but if you need it, there's no option. I keep having to remind myself that there's a logical end to all this; my life doesn't go on forever and my money won't need to last forever either.

Fortunately, for now, our investments have helped us manage to increase our net worth in retirement despite having a slightly net negative cash flow each year. For that reason, and based on our needs, the decision to refill the contingency fund is highly tactical and somewhat based on taxes TBH. It doesn't really change our investment strategy at all since we rebalance the remainder.

One piece of good advice. Check the sweep account your broker uses for the cash deposits. I just did recently, and mine was paying .03 percent in the default account. I assigned a different CD sweep account and picked up a 1.48% interest rate - that's about +$500 a month difference on our cash for the moment. Big difference in income; zero difference in type of account. (I sure wish I would have realized in on day 1.)

 

[pb4uski]

While I don't use the bucket method, my 5% cash allocation, which is replenished when I rebalance, is an omnibus bucket for living expenses and contingencies.