Author Topic: Budgeting/funding "known unknowns" in FIRE  (Read 3902 times)

madamwitty

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Budgeting/funding "known unknowns" in FIRE
« on: January 05, 2016, 10:56:00 AM »
I'm trying to figure out how to incorporate the "known unknowns" into my projected FIRE budget. Things like house repairs, car repairs, and the eventual new (i.e. used, in cash) car purchase. These are things I know will happen, but I don't know exactly how much or when. (I distinguish this from unforeseeable events like loss of a job or medical expenses, which is what my emergency fund is for.)

I think this is a little more complicated/constrained when using a Roth conversion ladder, since you have to anticipate expenses 5 years in advance. Off the top of my head, I can think of a couple general ways to budget/manage funds for these "known unknowns":

Budget an average annual expense, withdraw those amounts from retirement accounts and let unused amounts accumulate in a bank account for future purchases
Budget a total amount to have on hand (similar to or even pooled with an "emergency fund") and refill over time as needed from retirement accounts

How do YOU budget for anticipated but variable expenses in FIRE? Do you have rules of thumb for budgeting car and home repairs? How do you manage the funds for those expenses? Do you keep them in a bank account or in investments?

matchewed

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #1 on: January 05, 2016, 11:19:02 AM »
Budgeting for it is easy. Know how long a car lasts and how much you want to pay for a car. Voila budgeted.

For properties a general rule of thumb is 1% of the property value a year for maintenance. Voila budgeted.

Setting that aside monthly or making sure you have a cash account that is already flush is a tomato tomato sort of question. Figure out what works for you. I'd personally do a bank account for these sorts of things given safety and liquidity.

madamwitty

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #2 on: January 05, 2016, 11:29:07 AM »
Budgeting for it is easy. Know how long a car lasts and how much you want to pay for a car. Voila budgeted.

For properties a general rule of thumb is 1% of the property value a year for maintenance. Voila budgeted.

Setting that aside monthly or making sure you have a cash account that is already flush is a tomato tomato sort of question. Figure out what works for you. I'd personally do a bank account for these sorts of things given safety and liquidity.
Thanks for the input!

Sure, figuring out the amount for a car purchase is easy since you have control over how much your are willing to spend on a car. But what about car repairs?

Thanks for the rule of thumb on home maintenance. Have you personally found it to be pretty accurate?

For my own circumstance, I am concerned about having too much cash on hand for purposes of college financial aid (i.e. FAFSA), but on the other hand I don't want to have a lot of "income" (i.e withdrawal from retirement accounts) on a given year if a big expense comes up (less optimal for taxes, and also FAFSA.) There's also the balance of keeping money in investments (not missing out on earning potential) vs. a bank account (stable value, lower downside risk.) Wondering how other folks handle these issues.

Frankies Girl

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #3 on: January 05, 2016, 11:31:47 AM »
We have a separate emergency fund (approximately 2-3 months worth of expenses) in our brick and mortar bank, and I have about 1 year's worth of expenses (to be used in the event of a crash) in an online savings account earning better interest than the brick and mortar bank.

I know what our basic level of expenses are (with all the creature comforts that we require), and I then added 5K to that amount to cover for things like major house repairs, car repair/replace fund, and vacation. I came up with that amount based off of past performance; how much general house repairs cost us, how often we had cars worked on and that cost... it's basically a guesstimate, but a pretty good one I think.

We saved up enough in our investments to hit that total number, and now we're going to just pull out of investments on an as needed basis. So every month, we pull out enough money to pay for that month's expenses. If we have something unexpected come up, it will get lumped in with the monthly expenses and paid off at the usual time. We might dip into the emergency fund, but if so, come bill paying time, we'd just top it back up to the level we had it before.

Since we know a "high number" and planned for it, then the idea that many years we likely won't even use that amount means our portfolio should be just fine and the extra is just a cushion.

Even if you're worrying over the penalties with pulling from an IRA or the like... if it is a true emergency and you have to come up with the money, it's only 10% I think to pull the money you need out.

I'm lucky in that I have a large inherited IRA that is penalty-free to pull money; I just have to pay taxes on what I receive. And being in the married filing jointly/below the 15% taxable bracket, I won't actually ever pay taxes again unless we get really crazy with the money.


matchewed

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #4 on: January 05, 2016, 11:39:42 AM »
Budgeting for it is easy. Know how long a car lasts and how much you want to pay for a car. Voila budgeted.

For properties a general rule of thumb is 1% of the property value a year for maintenance. Voila budgeted.

Setting that aside monthly or making sure you have a cash account that is already flush is a tomato tomato sort of question. Figure out what works for you. I'd personally do a bank account for these sorts of things given safety and liquidity.
Thanks for the input!

Sure, figuring out the amount for a car purchase is easy since you have control over how much your are willing to spend on a car. But what about car repairs?

Thanks for the rule of thumb on home maintenance. Have you personally found it to be pretty accurate?

For my own circumstance, I am concerned about having too much cash on hand for purposes of college financial aid (i.e. FAFSA), but on the other hand I don't want to have a lot of "income" (i.e withdrawal from retirement accounts) on a given year if a big expense comes up (less optimal for taxes, and also FAFSA.) There's also the balance of keeping money in investments (not missing out on earning potential) vs. a bank account (stable value, lower downside risk.) Wondering how other folks handle these issues.

I don't own a home but it is a generally accepted rule of thumb from several online sources and I've seen people (successful landlords) on this forum claim usage.

Car repairs, do you own a car now? How much does it cost to maintain it? There you go.

FAFSA for who? Aren't you tossing in a few more variables than you need to on this?

madamwitty

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #5 on: January 05, 2016, 12:12:23 PM »
We have a separate emergency fund (approximately 2-3 months worth of expenses) in our brick and mortar bank, and I have about 1 year's worth of expenses (to be used in the event of a crash) in an online savings account earning better interest than the brick and mortar bank.

I know what our basic level of expenses are (with all the creature comforts that we require), and I then added 5K to that amount to cover for things like major house repairs, car repair/replace fund, and vacation. I came up with that amount based off of past performance; how much general house repairs cost us, how often we had cars worked on and that cost... it's basically a guesstimate, but a pretty good one I think.

We saved up enough in our investments to hit that total number, and now we're going to just pull out of investments on an as needed basis. So every month, we pull out enough money to pay for that month's expenses. If we have something unexpected come up, it will get lumped in with the monthly expenses and paid off at the usual time. We might dip into the emergency fund, but if so, come bill paying time, we'd just top it back up to the level we had it before.

Since we know a "high number" and planned for it, then the idea that many years we likely won't even use that amount means our portfolio should be just fine and the extra is just a cushion.

Even if you're worrying over the penalties with pulling from an IRA or the like... if it is a true emergency and you have to come up with the money, it's only 10% I think to pull the money you need out.

I'm lucky in that I have a large inherited IRA that is penalty-free to pull money; I just have to pay taxes on what I receive. And being in the married filing jointly/below the 15% taxable bracket, I won't actually ever pay taxes again unless we get really crazy with the money.

Thanks for sharing your strategy. Sounds like a good situation to have the flexibility to pull from both taxable and retirement accounts to manage taxes.

Certainly I'm not "worrying" about a 10% penalty, we Mustachians just like to optimize :-)

onlykelsey

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #6 on: January 05, 2016, 12:17:53 PM »
This is probably not helpful, but I just keep some randomly determined additional chunk of cash in my emergency fund.  Rather than looking up how much a car might cost me if I move out of the city, I am sort of like "eh, better add another 5K to that account."  I'm not sure I recommend this approach.

madamwitty

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #7 on: January 05, 2016, 12:24:13 PM »
Budgeting for it is easy. Know how long a car lasts and how much you want to pay for a car. Voila budgeted.

For properties a general rule of thumb is 1% of the property value a year for maintenance. Voila budgeted.

Setting that aside monthly or making sure you have a cash account that is already flush is a tomato tomato sort of question. Figure out what works for you. I'd personally do a bank account for these sorts of things given safety and liquidity.
Thanks for the input!

Sure, figuring out the amount for a car purchase is easy since you have control over how much your are willing to spend on a car. But what about car repairs?

Thanks for the rule of thumb on home maintenance. Have you personally found it to be pretty accurate?

For my own circumstance, I am concerned about having too much cash on hand for purposes of college financial aid (i.e. FAFSA), but on the other hand I don't want to have a lot of "income" (i.e withdrawal from retirement accounts) on a given year if a big expense comes up (less optimal for taxes, and also FAFSA.) There's also the balance of keeping money in investments (not missing out on earning potential) vs. a bank account (stable value, lower downside risk.) Wondering how other folks handle these issues.

I don't own a home but it is a generally accepted rule of thumb from several online sources and I've seen people (successful landlords) on this forum claim usage.

Car repairs, do you own a car now? How much does it cost to maintain it? There you go.

FAFSA for who? Aren't you tossing in a few more variables than you need to on this?

I do currently own a car but it's relatively new (2012 minivan) and I don't think it's hit steady state in terms of needed repairs. I don't know if the experience with my previous car (1995 compact) is relevant to repair expenses for my current car in the long term.

re: FAFSA. I have 3 kids, and FAFSA will hit about 4-5 years after FIRE, with an anticipated 10 consecutive years of college/FAFSA assessments. I believe considering FAFSA it is absolutely relevant to my FIRE financial strategy. Again, it's not a huge hit if I have to pay a 10% penalty on early IRA withdrawal (plus 40% increase in following year EFC thanks to FAFSA) but I prefer to optimize!

matchewed

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #8 on: January 05, 2016, 12:52:31 PM »
I just think it's an example of analysis paralysis well before you actually need to get into the nitty gritty by introducing FAFSA.

Run numbers on what is optimal a bit closer to when your kids need to apply for FAFSA as rules will (probably) change or your kids may not go to college, or they may get scholarships...etc.

madamwitty

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #9 on: January 05, 2016, 03:35:51 PM »
I just think it's an example of analysis paralysis well before you actually need to get into the nitty gritty by introducing FAFSA.

Run numbers on what is optimal a bit closer to when your kids need to apply for FAFSA as rules will (probably) change or your kids may not go to college, or they may get scholarships...etc.

Fair enough, FAFSA is not central to this question. Let me rewind.

Setting that aside monthly or making sure you have a cash account that is already flush is a tomato tomato sort of question. Figure out what works for you. I'd personally do a bank account for these sorts of things given safety and liquidity.

Originally I misinterpreted this as dismissing my question, now I see you are putting in a vote for "cash account" regardless of how it is funded. Thanks for this perspective.

matchewed

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #10 on: January 05, 2016, 04:11:21 PM »
I just think it's an example of analysis paralysis well before you actually need to get into the nitty gritty by introducing FAFSA.

Run numbers on what is optimal a bit closer to when your kids need to apply for FAFSA as rules will (probably) change or your kids may not go to college, or they may get scholarships...etc.

Fair enough, FAFSA is not central to this question. Let me rewind.

Setting that aside monthly or making sure you have a cash account that is already flush is a tomato tomato sort of question. Figure out what works for you. I'd personally do a bank account for these sorts of things given safety and liquidity.

Originally I misinterpreted this as dismissing my question, now I see you are putting in a vote for "cash account" regardless of how it is funded. Thanks for this perspective.

Yup, in the end you're budgeting for an expense regardless if it's groceries or fixing your roof I'd do it in the same type of account.

Retire-Canada

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #11 on: January 05, 2016, 04:36:09 PM »
Sure, figuring out the amount for a car purchase is easy since you have control over how much your are willing to spend on a car. But what about car repairs?



http://www.edmunds.com/car-maintenance/


madamwitty

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #12 on: January 05, 2016, 10:42:25 PM »
Sure, figuring out the amount for a car purchase is easy since you have control over how much your are willing to spend on a car. But what about car repairs?

http://www.edmunds.com/car-maintenance/

Awesome, thanks for the link! This is really useful.

I looked up my minivan model and was going to call BS on Edmunds; maintenance + repair costs seemed really high. But I checked their estimates for my previous compact car against a decade of my actual records. Their model year estimates only go back to 2010 (so I couldn't look up my 1995 car exactly) but the average cost per year for the 2010-2013 model years really does come out in the right ballpark. I guess I need to budget ahead for an expensive few years on my minivan after all :-)

madamwitty

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #13 on: January 05, 2016, 10:43:23 PM »
This is probably not helpful, but I just keep some randomly determined additional chunk of cash in my emergency fund.  Rather than looking up how much a car might cost me if I move out of the city, I am sort of like "eh, better add another 5K to that account."  I'm not sure I recommend this approach.

Haha, that's not so bad. At least you're thinking about it!

ShortInSeattle

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Re: Budgeting/funding "known unknowns" in FIRE
« Reply #14 on: January 06, 2016, 05:04:39 PM »
We use two methods to budget for the known unknowns.

1) We look at our spending history for things like household repairs, car repairs, etc and use the historical average. Those things aren't unknowns so much as they are "lumpy and irregular."
2) We have a fair amount of discretionary spending in our budget (travel, eating out, gifts) and when we have an unexpected expense it will come out of those budget categories. 

I like having "fun money" in my ER budget. I know many around here are very bare-bones with discretionary spending - but for me it provides double duty. It's fun money for a typical year plus it doubles as a buffer for unexpected expenses that may arise.

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