I transfer $400/month into a separate account for capex/repairs/replacement for home (incl appliances/furnishings) and auto. I count the $4800/year in my annual spending and for WR % but I do not count the balances in my worth. When something comes up I transfer the funds to pay for it - last year I had about $10k of spending for these things (biggest was HVAC with some other house & auto stuff) - but the account had grown to about $20k so no problem.
For me it helps to "match" the spending with expected life of things and benefits me in that I don't stress at all (about the $ or the impact on WR%)when something comes up.
Did you pick that $400 number out of the air or was there a history that got you to that number? I think I need to move to something like this for non-expense items but that is going to include a lot of guesswork as mentioned earlier. That means I need to annualized cost replacement for cars, roof, furniture, well, septic, etc. That is going to be a very large number.
Kind of a multi-prong analysis that ultimately was supported by history. I thought of the following over time to get there:
- General rule that you should expect to spend 1% of your house value each year.
- When I bought my house (and prior houses) estimated the remaining life of major things (roof, HVAC, appliances) and their costs (ie HVAC in current house was 17 years old and thought it should last 25, estimated cost of $8k, so 17/25*$8k = $5.4k that I needed in the account for that item - turned out to be $7k and only 1.5 years later so its not perfect).
- The above approach kind of applies to everything - cars, mattresses, couches, appliances, etc. There is an expected life to everything - sometimes it shit will happen sooner and some things can be stretched but it should all average out.
-Over many years I have found that for me - $400/month seems about right, the balances can get up there I guess but I attribute that more to the car replacement aspect of it, which I haven't bought a car in over ten years.
The above doesn't factor in "Capital Improvements" such as a new deck or kitchen, that would fall under discretionary spending in my mind and would be funded under my WR % somehow such as cutting back travel in that year or by other means such as side income or whatever.
Obviously my spend is higher than MMM and a lot of others as $4800/year represents a significant amount, but it works for me and I like to be prepared. If I rented this would be less, if my house and everything in it was new then it would be less....until 7,10,15 years from now when everything starts failing. It really is situation/individual dependent but it should be thought about.
That is going to be a very large number.
OTOH, if you are trying to retire at 35, you can't define/quantify it as much -- you might go through 4-5 cars, 2-3 roofs, 5-6 hot water heaters, 2-4 HVAC systems, etc. Or you could decide to downsize to a condo downtown after the kids leave and never have any of that! Obviously, you can't set aside the cash for multiple cars/roofs/repairs/etc., so instead you need to annualize the cost of all of those future expenses and increase your 'stache by enough to cover them.
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Tl;dr: It's not just about the money. It's balancing money, time, and certainty.
Basically this....its not a large number if you do it this way and it provides more certainty.