Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

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Tamales
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Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Tamales »

A few things that come to mind, as far as infrequent but costly expenses that will likely happen at some point (and in some cases e.g. a refrigerator, several times over one's lifetime). The timing is hard to accurately predict though, as are the future costs:

>Replace roof on home
>Paint house interior and exterior
>New flooring in home
>New large appliances (refrigerator, dishwasher, microwave, range, clothes washer/dryer)
>Water heater
>Furnace
>Computers
>Home electronics (various)
>Air conditioner
>New tires, brakes
>Replace car
>Replace small appliances (some can be >$100; ignore the others)

Just this list (I'm sure I'm missing some) can easily reach 6 figures in total replacement cost. The sum of the approximate average annual costs (replacement cost divided by typical service lifetime) can potentially reach 5 figures per year that you'd need in your budget. That's a pretty significant portion of many people's annual budget, and is probably not being included for most people. Seems like it should be.

Plus there are other situation-dependent things that you might know are coming soon like tree removal, sewer line replacement, replace faucets/fixtures, replace irrigation system, and those can get costly too.

Do you include these sorts of things in your budget? Or maybe you just have a "secondary emergency fund" for these sorts of thing? My thought was even if budgeting turns out to be off by quite a bit, any level of planning for these things is better than none.

What do you think?
What are some other infrequent expenses missing from my list?
My assumption is to pay cash for everything as it comes up (except maybe for the new car). But that's not always possible for everyone.
Rodc
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Rodc »

Many of those are not so hard to predict when they will be needed. Also, maybe more to the point, easy to predict when the odds go up. If you put 20-year shingles on your roof you can plan to have the funds in hand by year 15 and then whenever they need replacing you are good to go. You know about how long a car lasts (say be prepared to buy a new one in 10 years), tires last (say 50K miles and you know how much you drive) and about how long brakes last, that sort of thing. You know in about 5 years you will want to replace a desktop computer. Same with paint on the outside (depends on climate), and paint on the inside is not time critical.

So when young need to make some conservative estimate on these things and make sure you save enough each month so that when one of these things come up you will be prepared.

After a while your savings will be more than enough and hopefully your pay goes up faster than general living expenses and many of these things just get taken care of out of cash flow.

We do not have multiple emergency funds (real emergency vs something needs to be fixed slight surprise fund). We have one liquid fund and most months money goes in and once in a while something comes up that is too much for cash flow and money comes out. Last time that happened daughter had someone run into her car and total it so she got our 8 year old car and we got a new car 2-4 years early than we otherwise would have.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
sls239
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by sls239 »

Rule of thumb is 2% of a home's value per year for repairs and maintenance.

Although if it is a small house on a very expensive lot, that could be overkill.

For a car - I think assuming a 10 year lifespan is fine. Then you have options if you don't replace right at the 10 year mark, and you have at least some in case someone totals your car only 5 years in.

ETA - Some people call them sinking funds. And vacation would be another one.
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Tamales
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Tamales »

Thanks for the replies. I'll have to see how the numbers come out before using a rule of thumb like 2% of house value. I've never heard that rule of thumb before but it does seem like it's in the right ball park (although house values have varied quite a lot (up and down) over the past decade).

So for each item, you'd need to know/estimate:

1. average service life
2. cost of a new one (can vary a lot depending on your needs, and how far into the future you likely need it)
3. age of the current one
4. the period to budget over (i.e. avg service life minus current age)
5. Annual budget amount = cost of new(or replacement) divided by period to budget over.

Then sum up all the annual budget amounts for all the items, and add that total to your recurring living expenses to get total annual expenses.

This is the main thing I want to find at this point, so I can adjust the annual expenses entry in a simulator like cfiresim. The recurring annual expenses ("normal" living expenses) are adjusted for inflation in the simulator. But the infrequent expenses are things you are estimating the future cost individually, and generally are things that aren't included in the basket of goods used in CPI-U anyway.

I guess these should be kept as a separate category (entered in "Extra Spending" in cfiresim), not adjusted for inflation (or maybe inflated by a fixed amount annually?). Since they have been combined into an annual estimate, they'd be entered as a recurring amount even though the individual pieces are not annually recurring.

Does that sound right for entry of infrequent expenses into a simulator like cfiresim?
ubermax
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by ubermax »

Young families probably take on more debt for some of the biggies on the list and then as they reach mid-life it could be a combination of debt and ad hoc asset draw and then possibly ad hoc asset draw alone in retirement .

Not sure the budget approach is easy to pull off and as you noted it's expensive ; we live in a condo community and new roofs should have been part of the annual budget through the years , they weren't and so now it's special assessment time :(
Last edited by ubermax on Sat Aug 29, 2015 3:15 pm, edited 1 time in total.
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corn18
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by corn18 »

I like your plan to enter this into the sim. I use excel for all my budget data and use a similar approach.

Monthly income - savings - monthly expenses is my base budget. This gives me a good handle on my base budget which stays very stable over the years. All the variable expenses come out of savings as they come up.

Savings is a lot of stuff:

Not variable:

Retirement
College

Then I have a large brokerage/savings account for other stuff ($100k+):

Less variable (more predictable amount and/or timing):

Emergency fund (fully funded)
New Car (fully funded)
Estimated taxes (fully funded)

More variable (less predictable amount and/or timing):

Vacation
Car repair
House repair / maintenance
Vet visits
Other Annual expenses (HOA fees, AAA, etc...)
Kids activities (camp, school trips, etc...)
Bday, anniversary and Xmas gifts

As you have mentioned, all of these add up to a big amount. Except for retirement and college, it's all in one big savings/brokerage account and yes, it is a 6 figure balance right now. It can go down quite fast if a big expense or emergency comes up but I start the year with it fully funded for all of them. Even if I don't think I will need a new car that year, it is fully funded. Takes a lot of work to get to the pre-funded state, but makes things a lot easier.

During the year, I add enough each month to cover what I think WILL happen. This year, that is $2,380 / month. That covers all the "more variable" stuff. Now I have a stable base budget and a stable fund for variable expenses.

As for the less variable stuff, if I have to use it, I will divert money that is going towards college to refill those accounts. I am well ahead on college savings, so that isn't a big issue. I also have money going into my taxable retirement account that could be used, if needed.

Hope that helps.

Tom
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Independent
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Independent »

We've got two categories where you seem to have one.

We put "replace furnace" and "fix car brakes" in the "have to do category",
while "new floor coverings" and "new car" are in the "nice to do, but can defer" category.

We have always maintained a significant Money Market balance so we can write checks for "have to do" things as they come up.

We try to plan ahead and build up funds in advance for the "nice to do, but could defer" things.

An unusually bad run on the "have to do" account may cause us to invade the "nice to do" account, and thereby defer those things longer.
Grogs
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Grogs »

I budget an addition of about 3K to the EF each year. $500 of that is meant to be an inflation adjustment for my six months of expenses, and the other $2500 for a new car and other large purchases. So if my 2015 EF is at 25K for expenses, then I would want to be at $28K at the start of 2016. That's 25.5K for emergency expenses plus 2.5K for large purchases. If there are no large purchases in 2016, then by 2017 it would be 26K for expenses plus 5K for large purchases (31K total).

If I have to buy a new car, a refrigerator, or whatever, it comes out of the large purchase amount. If it's less than what I have saved, there's no problem and I just keep the fund where it is and add another $3K total at the end of the year. On the other hand, if I exceed the large expense fund (and start eating into my six months of expenses) then I'll slow/stop my investments until I get back to the baseline for expenses.
LeisureLee
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by LeisureLee »

We have a specific savings account for "next cars", which is easy to forecast (one car per eight years minus one eight-year-old trade in). Currently we save $250/mo per car, but this could be less if we were willing to wait longer between replacements or buy more reasonable cars.

We also keep an "irregular monthly expenses" budget which is for everything else on your list, as well as all other not-every-month expenses (car maintenance, tax prep/taxes owed, vacations). We set aside $1,500/mo for all of that, and like to keep a balance of around $10k. If nothing big needs replacing in the year, we can take several vacations and buy things that aren't very urgent (new computers). If we needed a roof, furnace, and fridge in the same year, we would skip most vacations for that year and probably go easier during the next. This year we replaced our bed and dishwasher and had an arborist take out some trees, and vacations are about normal.

Personally I think having over $100k sitting and waiting for all of those things to fail at the same time is inefficient, since many of them you do have some choice over when precisely you replace them (or how much you spend on the replacement). On the other hand, I haven't needed a roof replacement yet.
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corn18
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by corn18 »

LeisureLee wrote:Personally I think having over $100k sitting and waiting for all of those things to fail at the same time is inefficient, since many of them you do have some choice over when precisely you replace them (or how much you spend on the replacement). On the other hand, I haven't needed a roof replacement yet.
I agree with this, but every time I try to bring myself to invest the money, I stop based on need date. Here's how my $100k breaks down:

$50k EF (10 months)
$20k new car fund (need it in 3 years)
$30k short term variable expenses (need it within the year)

Man, does it bug me to leave $100k just eroding due to inflation.

Tom
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icefr
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by icefr »

For the first 3 years of owning my condo, I would just cash flow any home maintenance type things that came up. I now have 3 years of data that show I spend about $2,000/year, so now I'm setting aside $200/month going forward to cover these sorts of things.
Independent
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Independent »

Tamales wrote: This is the main thing I want to find at this point, so I can adjust the annual expenses entry in a simulator like cfiresim. The recurring annual expenses ("normal" living expenses) are adjusted for inflation in the simulator. But the infrequent expenses are things you are estimating the future cost individually, and generally are things that aren't included in the basket of goods used in CPI-U anyway.

I guess these should be kept as a separate category (entered in "Extra Spending" in cfiresim), not adjusted for inflation (or maybe inflated by a fixed amount annually?). Since they have been combined into an annual estimate, they'd be entered as a recurring amount even though the individual pieces are not annually recurring.

Does that sound right for entry of infrequent expenses into a simulator like cfiresim?
I believe all those things are included in the CPI.

Yes, for long term planning like cfiresim, it makes sense to add them all together and have a projected annual expense.
sport
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by sport »

Another poster mentioned a rule of thumb for home repairs. 2% may be a good average number. However, you should take your own situation into account. If you have a newer home, repairs can be much less than that. On the other hand, if you have an older home that is a "money pit", repair expenses can be expected to be much higher. Real estate values for your area also enter into that calculation.
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Tamales
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Tamales »

Independent wrote:
Tamales wrote: This is the main thing I want to find at this point, so I can adjust the annual expenses entry in a simulator like cfiresim. The recurring annual expenses ("normal" living expenses) are adjusted for inflation in the simulator. But the infrequent expenses are things you are estimating the future cost individually, and generally are things that aren't included in the basket of goods used in CPI-U anyway.

I guess these should be kept as a separate category (entered in "Extra Spending" in cfiresim), not adjusted for inflation (or maybe inflated by a fixed amount annually?). Since they have been combined into an annual estimate, they'd be entered as a recurring amount even though the individual pieces are not annually recurring.

Does that sound right for entry of infrequent expenses into a simulator like cfiresim?
I believe all those things are included in the CPI.
Ah, you're right! Or most of them are included anyway. Looking at a high level list of what's included in CPI-U, you wouldn't think so, but after a bit of searching I found a detailed list: http://www.bls.gov/news.release/cpi.t02.htm
The home improvement/repair types of things don't seem to be included but most of the other stuff is.
That makes it easier to just combine into one "expenses" number in cfiresim.
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obgyn65
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by obgyn65 »

I don't budget for infrequent expenses. I just have an annual budget that includes everything. What is not spent is saved.
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Bill M
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Bill M »

I started a thread on this subject a few months ago; it generated a lot of interesting discussion. http://www.bogleheads.org/forum/viewtop ... 2&t=162736

The planning process has to include the big occasional spending items to make sure enough is saved. But I never appreciated how much it throws off the withdrawal planning. My current approach is keeping 2-3 years of normal spending in a savings account, covering big expenses as needed from that savings account, and letting the normal replenishment each year fix things.

In addition, we also have a list of pending major purchases (RV camper, new piano, etc), timing TBD, and a savings account already funded for them. I do wonder if the distinction there is rather arbitrary and justifing toys. But retirement should be fun, and sometimes that costs some.
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packet
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by packet »

obgyn65 wrote:I don't budget for infrequent expenses. I just have an annual budget that includes everything. What is not spent is saved.
This is pretty much where we're at. We budget the easily predictable stuff and pile money into savings to cover the rest.

Every dime not spent on routine bills goes into a savings account.
This "contingency" fund serves multiple purposes:
- Is the first tier of our "emergency" funds
- Covers these larger and/or infrequent expenses
- Accumulates cash for land/school taxes
- Accumulates cash for yearly IRA contributions
- Accumulates cash for yearly taxable investment
Thus, if there are big expenses or lots of little ones that come out... either something else suffers or we live with a lower balance for a while (depending on circumstance).

As for planning for it... we kind'a don't. I do rough budgeting by using historical spending, but that's about it. All I really do, on a continual basis, is try to keep the outflow lower than the inflow.

I am guilty of not planning for the big stuff like cars... but that example has never worried me because we've always purchased them with 0% loans (so, we minimize down payment as well as monthly payments and keep the loan full term).

For everyone's favorite example, a new roof... that's already factored in because we are renovating a 130 year old farm house (no contractors, we do all the work ourselves). That's just us tho, certainly not appropriate for everyone.

I figure, only rich people keep budgets... so why should I? :D

:beerCheers,
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Mike Scott
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Mike Scott »

As a homeowner with cars and expendable stuff, taken as a whole, these things are pretty predictable. You just don't always know which one will be next and exactly when. Our budget has a pretty big miscellaneous category for stuff like this. We have not had the problem of accumulating so much $ in it that we needed to decide what to do with the extra. :)
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by jnet2000 »

Some of these things are emergencies and others are planned expenses. We save for planned expenses like a new car so we can pay in cash. I have saved for a new roof, fence etc in a savings account. For smaller things I simply cash flow.
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by The Wizard »

jnet2000 wrote:Some of these things are emergencies and others are planned expenses. We save for planned expenses like a new car so we can pay in cash. I have saved for a new roof, fence etc in a savings account. For smaller things I simply cash flow.
Cash flow is a key point.
You don't want to be over committed on an ongoing monthly basis.
I'm not sure what the maximum monthly "commitment" should be, but it depends on the size of your empire, so to speak, meaning that someone with a house and two or three cars needs to allow more $$ for infrequent expenses than someone with an apartment and one car.

I'll take a stab at it and postulate that it's good if you can keep routine predictable expenses to no more than 75% to 80% of your net income, after taxes.
If you get up to 90% of income committed, then even a new set of tires looks like an emergency and you'll likely be falling into continuing CC debt...
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Kenkat
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Kenkat »

Like a few of the others above, I also don't really budget for infrequent expenses. I maintain about a six month emergency fund and any unexpected expense of under around $1000 doesn't even really hit the radar. I just pay for it out of the six month pool of money and then defer discretionary spending somewhat until I am back where I want to be. This covers a lot of the items on your list such as appliances, car repairs, flooring, computers and electronics, etc.

For the larger items, I am perhaps in the minority in that I will use what I would consider a judicious amount of debt to fund some of the larger items. I have about 80% equity in my home, and so for bigger items such as cars, major home items such as a roof or furnace, I use a home equity line of credit (currently at 2.75% / approx. 2% after tax) and then pay it down on a schedule that I set. I have enough in taxable investments to cover the full amount, but I would rather let those grow at what is hopefully a higher return while also maintaining liquidity.
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by ubermax »

The Wizard wrote:You don't want to be over committed on an ongoing monthly basis.
I'm not sure what the maximum monthly "commitment" should be, but it depends on the size of your empire, so to speak, meaning that someone with a house and two or three cars needs to allow more $$ for infrequent expenses than someone with an apartment and one car.

I'll take a stab at it and postulate that it's good if you can keep routine predictable expenses to no more than 75% to 80% of your net income, after taxes.
If you get up to 90% of income committed, then even a new set of tires looks like an emergency and you'll likely be falling into continuing CC debt...
+1 yes the size of the empire and the depth of your pockets which for many people/couples correlates with where they are in their career ; it's a fun exercise to run some software and estimate future non-routine unpredictable expenses and quite another feat to be able to fund these expenses when you're early in your career ; not universally , there's always the outliers , but for many .

I know a young couple who recently moved into an older home inside the Rte. 95/128 belt around Boston and almost immediately needed a car and a new furnace - they took out a loan and took advantage of an energy saving program through the State.

I think as you move along in your career and your children get older you reach a point where you can possibly start to think about budgeting for these unpredictable items ; I'm also not sure how representative this audience is of the general population , I think budgeting for these expenses would be very onerous for many .
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by jlawrence01 »

I have always found that since we have had an emergency fund exceeding $25,000 (which was about 1988 or so), we have had no emergencies. Sure, we have had to replace one furnace, at least three water heaters, and a transmission and the like, but there has been no sense of panic during those periods.

Everything that has been posted by the OP can generally be planned for and in most cases, can be deferred 2-3 years if necessary. No one will die if you have to keep the same flooring or paint the exterior in 24 months as opposed to doing it today.

Personally, I would plug in 2-3% of your home's value for repairs and maintenance if you do a line to line budget. Then I would adjust after 2-3 years based on past experience.
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by SuperDay »

100% agree with JLawrence.

Budgeting and planning are never meant to be 100% accurate. I budget and I try to come up with reasonable monthly amounts based on my historical data. But I always know that I may spend a few hundred more or a few hundred less in a particular month in one of my high-level budget categories. If I want to buy a new couch or a dishwasher - that still goes against my 'Shopping' budget. It is the same as buying a new coat. Buying stuff in my book is called: "Shopping". No matter if the price tag says $100 or $1000. That particular category fluctuates more then others do month-to-month. But if I see it went too high last month - I slap my hands and talk to my wife. :-) the latter never works. But that's besides the point. :-)

And I think that's the purpose of budgeting: act appropriately when you see that "actual" is too far off from "planned". I still budget even for unpredictable or irregular expenses. I include regular and irregular in my monthly budget. I just set my expectations: I am not trying to achieve a 100% accuracy matching my "planned" amount.
My "Bills" budget goes up anyway in the winter. I have electrical heating, and winters are cold here. Budget may be seasonal. If I know it - I am prepared. That's the purpose of budgeting. It makes you aware of what's coming up. Why would I exclude my annual bills (like AAA) from 'Bills' category? Just because it is a bill that is paid annually? It is still a bill.
feh
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by feh »

For infrequent, large expenses, I divide the cost of the expense by the expected frequency, in years. That is then a line item in the budget.

When it comes time to pay for such things, I use my EF. Some years you'll spend more than you expect, others less. In the years where you spend less, use the money to bring your EF back up to where it should be.
kaudrey
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by kaudrey »

I have a budget line item called Capital Expenditures for the house stuff. I then keep track of what we actually spend on house-repair stuff - some years we are over, some under. I do this for "car expense" as well (for repairs and new purchases).

But for cash flows, I don't have separate accounts. I have one pot of money in our savings account, and just use it as needed.
mptfan
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by mptfan »

This topic was also discussed on the early retirement forum...

http://www.early-retirement.org/forums/ ... 75829.html
Rodc
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Re: Budgeting infrequent expenses (refrigerator, new tires, paint house, etc)

Post by Rodc »

tomhole wrote:
LeisureLee wrote:Personally I think having over $100k sitting and waiting for all of those things to fail at the same time is inefficient, since many of them you do have some choice over when precisely you replace them (or how much you spend on the replacement). On the other hand, I haven't needed a roof replacement yet.
I agree with this, but every time I try to bring myself to invest the money, I stop based on need date. Here's how my $100k breaks down:

$50k EF (10 months)
$20k new car fund (need it in 3 years)
$30k short term variable expenses (need it within the year)

Man, does it bug me to leave $100k just eroding due to inflation.

Tom
You could invest in a rolling bond or CD ladder. You could do this with half the money and leave half in cash.

You could keep 70% in cash and put 30% in stocks. Unlikely you will need all $70K and more in one go.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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