extra money

[LivingAlmostLarge]

How do you guys handle big expenses? What do you guys do with extra money? Do you send it to an investment account monthly? When you have expenses like home repairs or car reparis or replacing stuff, do you pull from your investment account? Do you pull from you EF and just replenish it? Or do you have just an extra cash cushion you pull from that is separate from your investment accounts and EF?

I find myself at a bit of a crossroads. I notice I don't like taking money out of my investment accounts ever. One exception is what I set aside for taxes (i'm self employed and stock sales). That I already set aside what I know I owe and wait until I make an estimated payment. But I have my EF at Vanguard in the settlement fund, thanks Disneysteve for pointing out how high it is.

I also rarely send money for investing monthly outside of our annual contributions to retirement stuff. Anyway I was just thinking I sort of let the excess cash build up in our capital one savings accounts and then it eventually gets spent or maybe I transfer a small amount when it get to $10k excess. But it seems like that extra cushion just gets burned up. So the EF is really a very generous EF for a maybe one day job loss and literally no inccome. Not really an emergency fund for stuff happening. Stuff happening is we no longer have income coming in.

How do you guys handle it? I'm trying to figure out if and how to change.

[Jluke]

I’ve been intentionally building up my cash pile since around 2020. I think I was at 40k then and am now up to 10% cash vs total investments.

I do not call it an EF. Life has only gotten more expensive so I’m glad I have that cash pile

i recently started sending $200 to vanguard every two weeks and buying partial shares of VTI in my taxable account.

I do everything in my power to not touch my taxable investments. I want them to grow and I do not like having to do the taxes when selling so that deters me.

I have in the past sold some stocks out of my taxable account to pay for things (regret selling winners) or take advantage of tax loss harvesting (no regret; loser stocks).

Then, in the new year I will use the cash for my Roth contributions then start the cycle all over again of having cash for property taxes, insurance (home and auto) etc.

[Fishindude77]

Or do you have just an extra cash cushion you pull from that is separate from your investment accounts ?

Don't really have a designated emergency fund, just the above.
Usually have $30-50k in a checking account and more cash in CD's. If we wanted to purchase something big like an automobile, we might wait till a CD matures.

[riverwed070707]

This is such an interesting question for this group since most of us have been on a path to financial independence for a long time. Back when I started on this board, I had separate buckets of money for things like car repairs, home maintenance, vacation, an efund and a set dollar amount I sent to investments. Now as I've become more financially secure, I'm less rigid about what money is earmarked for. I'm steady on what I send to typical retirement accounts each month, but I don't $0 budget anymore and I don't spend everything I earn. I like to keep my checking account between $6-10k. When it creeps over that by a few thousand and I don't have property taxes or annual insurance payments coming up, I transfer it to my Capital One Savings. When my savings gets over $50k, I pick up a hard money loan as a way to pick up some additional interest on that money, while knowing it won't be tied up for more than 6 months or so. I currently have about $300k cycling into HMLs in $50-110k increments. Since they earn 12%, I don't feel like that money could be doing more elsewhere but it also keeps me from ever feeling like I wouldn't have a place to pull from if a MAJOR unexpected expense came up.

My definition of a major expense has also shifted dramatically. 15 years ago that would have been anything over $2k. Earlier this week I dropped $9,500 on replacing some exterior wooden stairs to the second story of one of my properties and didn't think twice about it. When I wrecked my car a few years ago, I paid $14k cash for my "new" one and it didn't feel like a hard decision. "Major" that would require me to think about shuffling money around is probably more in the $20-30k range and there are very few emergencies I can think of that hit that dollar amount - pretty much as you said, for job loss.

[ua_guy]

We keep an EF topped off in savings and CD's and have gotten in the habit of establishing a reserve in checking. We seem to regularly incur big expenses so rather than shuffle money in and out of an EF, we just plan for it now and leave it in checking. $10k for roof maintenance and repairs. Quarterly tax pre-payments are due, or it's April/October and property taxes are due. We just had a $20k bid for new HVAC, ours is old so we thought it would be a good idea to start shopping rather than be left in a lurch. We'll probably plan to do that next year and start building up the reserve for it.

[bjl584]

I keep (probably too much) cash in a high yield account.
The only time I took money out of an investment account was when I bought my house.
But that money was earmarked for a house downpayment, and was a longer term play.
I had it invested in a few things that yielded better than a savings account, as I was on a 5 year time line.

[riverwed070707]

We keep an EF topped off in savings and CD's and have gotten in the habit of establishing a reserve in checking. We seem to regularly incur big expenses so rather than shuffle money in and out of an EF, we just plan for it now and leave it in checking. $10k for roof maintenance and repairs. Quarterly tax pre-payments are due, or it's April/October and property taxes are due. We just had a $20k bid for new HVAC, ours is old so we thought it would be a good idea to start shopping rather than be left in a lurch. We'll probably plan to do that next year and start building up the reserve for it.

how big is your house!? $20k for HVAC is absolutely insane. Are you getting more quotes? I've replaced a good number of furnaces in the last 5 years and they typically run around $3500 each; if my places had AC, it would add another $3k.

[kork13]

For many years, partly goes by discussions here, I've kept cash in a series of layers, effectively doing "all of the above" from what LAL described. As expenses grow bigger than each successive layer, I shift to pulling from the next layer down. Afterward, I just refill them from cash flow & maybe reduce taxable investments for a month.

- $1k-$2k buffer in checking (account averages $2k-$10k)
- $10k-$15k in cash savings
- $5k-$15k+ in brokerage MMF (also serves as dry powder for investment opportunities)
- $5k EF in savings
- $20k EF in I-Bonds
- $XXXk in taxable investments
- .... Anything that out-spends my taxable brokerage is a pretty significant life event, so everything else starts to be on the table & we enter survival mode.

Realistically, it would take a sudden $40k-$50k+ expense to really make me sweat. Most of the time, we just pull from cash savings for larger expenses, and we refill it over time. For new money beyond savings, I normally send it toward the taxable brokerage, unless something else presents itself. All of our saving/investing is automated on a weekly or monthly basis (including most of our cash-storage accounts), so I mostly don't have to think about it. When a given account gets to be too big, I'll send the excess to the taxable brokerage.

[disneysteve]

Here's the fundamental problem with EFs that never gets talked about. Most of what people say their EF is for isn't an emergency. Car repair? Not an emergency. Cars break, regularly. If you own a car, you need to budget for repairs. New roof? Not an emergency. If you own a home, maintenance costs are going to be a constant. Medical bill? Not an emergency. You should know what your potential OOP costs are with your insurance and know that sometimes you're going to need that money. You won't need a new transmission or a new hot water heater every year, but you will have some unknown bills every year and they need to be a part of your financial plan.

What's an EF for? In my mind, it's for loss of income. You get laid off because the company is struggling. You get injured and can't work. You get fed up with your job and quit spur of the moment. Nearly everything else in life is predictable. Not the specifics but the ever-present need for "extra" spending beyond your recurring bills. Stuff breaks. People get sick or hurt. That's why living below your means is critical to success.

My routine has always been to maintain a large cash cushion. Call it an EF if you'd like. That's where we've always drawn from when a one-time bigger expense came along - car broke, fridge died, medical bill happened before our deductible was met, etc. Now that I'm retired, same routine. We currently have about 16% of our asset allocation in cash. Many experts recommend retirees keep about 3 years of expenses in cash to protect against SORR. We currently have about 5 years worth. Now that I've been retired for a year, I'm comfortable saying that's too much and I've already started investing some of that cash to work back down closer to 3 years.

From reading posts on the ER forum, some people prefer to stay fully invested and just sell shares whenever they need cash. I'm not comfortable with that method so I use the cash cushion method instead. Prior to retiring I turned off automatic reinvesting of dividends and capital gains on many of our accounts so that instead of buying more shares, those funds would replenish the cash accounts that we draw from. If I was still working, excess income would replenish them.

We are currently in the midst of a major (to the studs) kitchen remodel. It'll probably end up costing 40-50K by the time we're done. We won't need to sell a single share of stock or mutual fund holding to pay for it because of the whole cash cushion system.

[LivingAlmostLarge]

About 5 years ago I had an investment guy tell me to invest all our cash. Our cash flow at the time was sufficient to cover most expenses. True at that time. Currently not true, but not exactly false. Now I find that we have bigger chunks of money and bigger taxes to be paid in lump sums. Less withholdings so I'm hanging onto a lot of cash at any given time.