How to pay for a $15k expense

[Math N Money]

This post is 50% asking for genuine advice and 50% wondering if other people feel the same way as me.

The wife and I have a 1 year old and have been talking about making some improvements in the yard. We’re looking at a new fence and fixing up our old deck. Nothing crazy really, and planning on doing most of it myself, but still looking at around $15k. My question is how do you all approach paying for mid-sized expenses?

I feel like we’re doing the right things financially. We are debt free except the mortgage. We max out both ROTHs each year and contribute a fair amount to the 401k. We keep $45k in a savings account for an emergency fund and other cash needs, and invest anything additional above that. My problem is that a $15k expense wipes out a third of our cash savings since everything else is invested. Because of this, it ends up feeling like we can’t really afford anything that isn’t explicitly budgeted, and that leaves us feeling broke.

We are in our late 20s. Approaching $450k net worth ($270k house equity, $125k between ROTH, 401k, and a small taxable, and the $45k cash), and I make about $175k while wife is home with our daughter. These numbers feel decent and yet we can’t stomach $15k to make some home improvements. I guess since we put all the extra money at the end of the month into investments, starting with retirement accounts, and the cash is technically our emergency fund we don’t really have any money at all that we can use without feeling guilty.

Are we approaching this the wrong way? Or maybe based on our numbers you guys will tell me I’m right to feel like we can’t afford mid-sized expenses right now.

[travel2020]

What’s your spending like each month? As a home owner, I’ve had to deal with expenses such as a new roof, remodeling, furnace, etc., and it’s doable with some planning even at a lower salary than yours.

Homes do require periodic maintenance and updates, so it helps to plan ahead and possibly have a separate bucket where you are saving regularly just for large home expenses and that way you won’t feel you are draining your emergency funds.

[kenner]

Kind of depends.  If it was an emergency, I'd use cash.  Since these are improvements instead, I'd either save up a separate block in advance or (more likely) look at a new credit card or two.  That assumes that you have a use for credit card bonuses, but at 15k planned spending...if you pick the right card/cards you could potentially have a year+ at 0% to pay the costs off (so easier to spread out monthly without dipping so much into savings) plus a nice bonus or two at the end of it.  Obviously caveats apply, you have to make sure the card you want offers what you want, definitely have a plan to pay it off while at 0%, all of that, but if you do have a use for bonuses a large planned purchase is an easy way to meet a minimum spend plus giving you some additional flexibility around payments.

[Sandi_k]

We try to do one improvement project per year, which costs between $10k-$20k.

But yes, I feel your pain. We don't have the funds to do a bedroom/bath down-to-the-studs renovation, a deck replacement, or a kitchen reno until after I turn 59.5, or we inherit some funds.

[SuseB]

We tend to tackle these expenses with a mixed approach. First, a $15k project where you are doing most of the work yourself doesn't mean a full $15k outlay up front (or at the end of the job). You'll have to lay in supplies, maybe hire machinery etc but if you're doing the work while working your regular job then realistically the costs will be spread over a number of weeks/months. So some of it you will be able to cash flow from your general expenses. Furthermore, if you are home working on the yard you are not out spending money on travel, food etc. Additionally, you say that you send your spare money each month to investments, rather than investing a fixed amount per month. This will mean that naturally in the months you are spending on the yard, you are sending a bit less to your investments.

If we have a month during the project where we spend a little more than we can manage to cash flow, we would use cash from our EF - as the time on the project passes the interest on the EF will help to build it back up, and you can always divert some investment cash to refill the EF once the project is done. I view my EF not as an absolutely fixed figure, but as a pot with a little flex in it to accommodate our needs. So I don't need exactly $45k every day of the year. If for a few weeks it's at $40k, it's still an EF! If you don't have this mental buffer, you could look at increasing your EF to say $50k before you start the work and then using the buffer. Alternatively, you could use 0% credit cards to finance the supplies/hire elements and pay it off gradually over a year or so. We tend to do this for vehicles and often manage to keep a rolling 0% balance for several years by switching to new cards. We are in the UK though and the way cards work may be slightly different.

Anyway, hope this is helpful. Any approach that spreads the cost over several months rather than an upfront (or final) lump sum will minimise the risks/costs of spending the money, in terms of investment returns, risk of needing the EF, interest on the EF, etc etc.

[Sanitary Stache]

We build up a sinking fund for mid size expenses. We estimate our income and agree on a budget every month.

I’ve got a roof replacement job to do this year and we saved $10,000 for it last year.

We treat the EF as off limits except for an emergency and we only keep 6 months of base expenses in it. For context, We would use the EF to pay for something critical like an unplanned roof failure or something we highly valued like showing up for family in a medical emergency or for an unplanned job loss. But we likely wouldn’t use it if we lost our only car or needed to replace the refrigerator. I would think that if our porch suddenly failed then we would make it a safe situation with our cash flow and then plan for a replacement and start saving for it.

Past home improvement projects we have saved up before hand or cashed flow like others have suggested. I took a 0 interest loan once and stretched out repayment. It’s nice getting zero interest. I have also tried taking out new credit cards for the initial bonus on a large purchase. These all seemed fine and we didn’t get burned by forgetting about them. But now I have two credit cards that I don’t use.

[Tigerpine]

We save in advance and pay in cash for expenses like this.  As has been stated already, home projects are fairly predictable, so it pays to have a sinking fund for home maintenance projects.

I think you must be something right, as you have a healthy net worth for your age. However, having control of your finances should be liberating, not a straightjacket.

[Omy]

How long will it take to refill the EF? Could you do it in a few months through cutting back a bit on budget and contributions to your taxable account? If so, I'd probably do that.

In my 20s, I would have held off until I filled my sinking fund. Retired in my 60s, I just put it on my credit card.

[Raenia]

We also go the sinking fund route. It's psychologically easier for us to spend the money if we know it was set aside for house maintenance projects intentionally.

[sonofsven]

I put expenses like that on a credit card with a 12-18 month 0% rate and a spending bonus as well.
For $15k in spend you could expect a bonus of $800-$1200, which you could take as a statement credit, further reducing your balance.
Then divide the remaining balance by the number of months at 0% to determine your monthly payment so it is all paid off by the cut off date.
Could you pay approx $1,000/mo?
This would depend on finding the right card and getting accepted for the card and it having a high enough credit limit, it might require more than one card.
See Doctor Of Credit for card options.

[Math N Money]

Thanks for the suggestions everyone. I’m typically credit card adverse just because I like being debt free, but I’ll look into some 0% options.

Is a HELOC or something an option here? I guess that feels better than a credit card because I’m borrowing against some real dollars instead of just consumer debt. And having to put $15k on a credit card still makes me feel like I can’t actually afford the $15k despite my net worth number being healthy.

A sinking fund makes sense to me too. We’ve done smaller versions of this like putting aside a few thousand when the baby was on the way which made making purchases like strollers and car seats hurt a bit less. It makes sense to do something on a larger scale for home improvements too.

[Math N Money]

However, having control of your finances should be liberating, not a straitjacket.

This. I do feel generally in control of my finances. I compare myself to my friends who are all taking vacations and going to expensive concerts and we do nothing of the sort which I suppose is the MMM way. In my head I know we’re making sacrifices today for freedom in the future, and it makes me feel good that I’m probably in better shape that most of them as far as net worth. I wish being so in control of my finances made it easier to spend $5, $10, $15 thousand on something we need. But it’s exactly the opposite. It makes it even harder to spend that because it’s money I think I should be investing. But then when I invest it, or worse put it in a retirement account, then the money feels gone at least for today and we end up feeling like we can’t afford things at all.

[Sandi_k]

However, having control of your finances should be liberating, not a straitjacket.

This. I do feel generally in control of my finances. I compare myself to my friends who are all taking vacations and going to expensive concerts and we do nothing of the sort which I suppose is the MMM way.

No, this is not the MMM way. The MMM way is to identify what you value, and focus your spending there. If you value travel, or concerts, you can do that. But you have to be prudent elsewhere, so you're living beneath your means overall.

In my head I know we’re making sacrifices today for freedom in the future, and it makes me feel good that I’m probably in better shape that most of them as far as net worth. I wish being so in control of my finances made it easier to spend $5, $10, $15 thousand on something we need. But it’s exactly the opposite. It makes it even harder to spend that because it’s money I think I should be investing. But then when I invest it, or worse put it in a retirement account, then the money feels gone at least for today and we end up feeling like we can’t afford things at all.

When we hit our mid-30's and both had spinal surgeries, we realized we needed to loosen our grip a bit. We started taking a week off every year to do something (like travel) for our anniversary. Fifteen years later, I am glad we have those experiences and memories - DH's BFF just had a hip replacement, and it's gone badly wrong.

If travel is important, and missing it will be a lifetime regret, figure out what is "enough" for savings right now. For us, we decided that was 15% of our gross income into savings. And then with every raise, we diverted a portion into our retirement savings.

[LifeHappens]

No, this is not the MMM way. The MMM way is to identify what you value, and focus your spending there. If you value travel, or concerts, you can do that. But you have to be prudent elsewhere, so you're living beneath your means overall.

Yep. This is it. Spend in accordance with your values. Don't waste money on things you don't value.

OP, you sound like a lot of people when they first get into MMM/FIRE. It's easy to get really extreme and end up miserable. Some people go through this process and learn to lighten up after a while. Others become unable to spend and turn money into an end rather than a means. It sounds like you need to deploy some of your little green soldiers to enhance your living environment (like fencing the yard to make it safe for a child).

One last thing - debt is not always bad. Taking out a credit card with a long 0% interest period can very smart. Way smarter than taking out a HELOC which is going to be in the 8-10% range right now.

[ChickenStash]

If it were me, I would just set aside some funds from my normal paycheck for a few months then pay it outright or pay it with a few CCs with good into points offers then pay it off before incurring interest. With a stated income of $175k, it shouldn't take long to make that happen.

I don't do emergency funds anymore, but if you feel you need one then I would definitely not raid it for a luxury purchase like home improvements. Home repairs, sure.

[sonofsven]

Thanks for the suggestions everyone. I’m typically credit card adverse just because I like being debt free, but I’ll look into some 0% options.

Is a HELOC or something an option here? I guess that feels better than a credit card because I’m borrowing against some real dollars instead of just consumer debt. And having to put $15k on a credit card still makes me feel like I can’t actually afford the $15k despite my net worth number being healthy.

A sinking fund makes sense to me too. We’ve done smaller versions of this like putting aside a few thousand when the baby was on the way which made making purchases like strollers and car seats hurt a bit less. It makes sense to do something on a larger scale for home improvements too.

What "feels" better, 6+% on a Heloc spread out over 15 years or 0% on a cc that you pay off in 1-1.5 years? Will the Heloc give you a free $1000 like the cc?

[tweezers]

One last thing - debt is not always bad. Taking out a credit card with a long 0% interest period can very smart. Way smarter than taking out a HELOC which is going to be in the 8-10% range right now.

This. 

Over the years we renovated two houses and built a garage by leveraging zero interest credit cards.  We'd put ALL expenses on the zero-interest cards (0-rate period ranging from 12-24 month at the time) and make the minimum payments while accruing the funds to pay them off once the zero interest rate period ended.  It saved us thousands of dollars through essentially interest-free loans (plus the spend bonuses sonofsven mentioned), and allowed us to accelerate our objectives and take advantage of market conditions (e.g., one remodel was done during the 2010 recession and there were a lot of contractors available).  I would never consider a HELOC when free credit is so readily available to those with high credit scores.

[Laura33]

A sinking fund makes sense to me too. We’ve done smaller versions of this like putting aside a few thousand when the baby was on the way which made making purchases like strollers and car seats hurt a bit less. It makes sense to do something on a larger scale for home improvements too.

IMO a sinking fund is a permanent part of any budget.  Everyone has "lumpy" expenses -- things that you know are going to happen but can't cover out of your normal monthly cash flow.  The easiest way to handle them is to account for them in advance.  We had a separate money market account that we did automatic contributions to to cover all that stuff -- home improvement/repairs, vacation, car replacement/major car repairs, etc.  It was a fairly significant monthly contribution, because those were some big-ticket items, but it made sure the money was there when needed, without leaving me feeling strapped or like I had to dip into investments/EF to cover it.

I feel like we’re doing the right things financially. We are debt free except the mortgage. We max out both ROTHs each year and contribute a fair amount to the 401k. We keep $45k in a savings account for an emergency fund and other cash needs, and invest anything additional above that. My problem is that a $15k expense wipes out a third of our cash savings since everything else is invested. Because of this, it ends up feeling like we can’t really afford anything that isn’t explicitly budgeted, and that leaves us feeling broke.

FWIW, your approach can be a useful tool to combat lifestyle creep.  You want there to be pain involved in paying for unnecessary stuff, because that pain forces you to evaluate whether it is necessary, whether it is the best use of your money, etc.  I tend to track how we're doing on budget by watching the checking account balance; if it drops too low, then we're doing something wrong, and I need to look more closely.  OTOH, if it gets too high, it's very easy to just let yourself spend what's there, because now you feel flush.  So I periodically adjust automatic investments (like when we get raises) to make sure that money doesn't get frittered away in hedonic adaptation.

But this works only if you leave yourself enough to cover the things you actually do need (or decide you want after looking at them closely).  Ergo the sinking fund.  It's generally out-of-sight, out-of-mind, so I personally find it less tempting to fritter.  But when the house needs a new roof, the money is there to cover it, so I don't have to stress about it at all.

[Math N Money]

How do you all structure these sinking funds? Do you target a fixed amount and then replenish if you dip into it? Or do you typically just put a set amount aside monthly and let it grow if you don’t need it?

[economista]

How do you all structure these sinking funds? Do you target a fixed amount and then replenish if you dip into it? Or do you typically just put a set amount aside monthly and let it grow if you don’t need it?

I do it both ways, depending upon what category it is. For medical expenses, my family's out of pocket maximum for the year is $3000, so I contributed a set monthly amount until that fund had $3k, and now I only contribute enough each month to make sure the account always has $3k in it. This is similar to how I approach sinking funds with a known date/amount, like the car insurance due every 6 months or annual fees for things. I contribute just enough each month to have the amount I need at the due date.

For my home improvement sinking fund, I just always contribute a set amount and let it grow. I'm sure there would be an upper bound that I would stop at, but I don't have one in mind and I've never had it high enough that I've thought about stopping. This is also how I approach car repair/replacement

[Raenia]

Let it grow. There's always that one year that you have a broken furnace, major electrical repair, and a flood all in a row.

Ask me how I know.

[MDM]

We keep $45k in a savings account for an emergency fund and other cash needs, and invest anything additional above that. My problem is that a $15k expense wipes out a third of our cash savings....

How many months' expenses is $45K - $15K = $30K?  What if you include the Roth contribution amount and treat Roth IRA as an emergency fund?

[Math N Money]

How many months' expenses is $45K - $15K = $30K?  What if you include the Roth contribution amount and treat Roth IRA as an emergency fund?

$45k is about a year, so $30k would be around 8 months. And it will only take me about 5 months to get back to the $45k if I spend the $15k now if I don’t invest for those 5 months. It’s the mental block of not saving for any amount of time that a big part of this for us.

My issue with thinking of the ROTH as the emergency is how much of a long term set back that is. $15k is a whole year of contributions that I’ll never be able to put back in since we max every year.

[MDM]

How many months' expenses is $45K - $15K = $30K?  What if you include the Roth contribution amount and treat Roth IRA as an emergency fund?

$45k is about a year, so $30k would be around 8 months.

There is no objectively correct emergency fund size.  You can find people who will say 2 months and those who will say 2 years.  8 months is not unreasonable.

Do the recommendations in Investment Order seem applicable to you, and if so where are you in that hierarchy?

[Omy]

We have always used the term "Emergency Fund" lightly since money is fungible. Ours is for emergencies AND for sinking fund items expected in the next few years - so ours was always larger than most.

We tend to keep this money in laddered I Bonds and CDs and in our HYSA. We keep it out of the stock market. It's approximately 10% of our net worth. We use credit cards to pay for the actual items to get points. Then we use our EF "cash" to pay off the credit cards.

Admittedly we left money on the table over the years by not having more in the market, but we never had to sell stocks or borrow from equity to pay for anything. So we traded some earnings for peace of mind. Carrying this strategy into retirement has been very helpful. We never worry about having to sell stocks when the market is down because we always have enough "cash".

We still consider this money saved and invested - it's just not in the stock market.

If the improvements are a priority to you (and since its only going to take you 5 months to refill your EF), I would pay from the EF knowing that I still had credit cards and home equity and IRAs and brokerage accounts to tap in the case of a real emergency.

I'd also recommend bumping up the amount you keep in the EF (or in a separate sinking fund) so you don't feel so constrained in spending on your priorities. Make the improvements and spend the next year refilling your EF and then adding another $20k to the EF (or separate SF if that gives you more "permission" to use it). Since you're already maxing out IRAs and Roths and have frugal habits, you're well on your way and can afford to invest in your priorities as a family.

[Math N Money]

Do the recommendations in Investment Order seem applicable to you, and if so where are you in that hierarchy?

Yes, I’ve studied that post and try to follow the order. I kind of consider myself on step 8.

0. 10 month emergency fund in cash.       
1. No 401k match at my company (it’s a startup).
2. Debt free except a 2.99% mortgage.
3. Not eligible for HSA
4. Already maxed Roth for the year (both mine and my wife’s).           
5. I’m not quite maxing my 401k. I’ll contribute about 50% of the limit this year. The investment options aren’t great in my employers 401k.
6. Mega backdoor Roth not applicable (I don’t think).
7. Debt free except a 2.99% mortgage.
8. Just made it to this step earlier this year and started putting anything extra in a taxable. Negligible amount at this point.

[FLBiker]

You've got lots of good opinions here, so this may not add much value, but a couple of thoughts from my POV:

• If I had $45K in my emergency fund, I wouldn't hesitate to spend $15K on something important (even if not technically an emergency).  And if $45K was the emergency fund I wanted, I'd build it back up after that.  I definitely wouldn't borrow money with interest in this situation.
• Personally, when DW and I both worked at stable jobs, we had a very low emergency fund (maybe 3 months of expenses).  Now that I'm the primary earner, and my job isn't as stable, we keep more like a year.  When I finally pull the plug, I'll want 2 years, I think, but that's because in addition to regular SORR, we also have currency risk (as we earned primarily in the US but are planning to retire in Canada).  I'm also much more comfortable with investment risk than my wife, so these numbers have been a compromise.  All that's to say, the right emergency fund size depends on lots of things.
• Having a 1 year old is hard, and it is reasonable to be more willing to throw money at problems when life is harder (e.g. small children, illnesses, etc.).
• Big picture, you're in great shape.  If you earn $175K and spend $45K, you're golden.  If you're job is very unstable or if you truly hate it, that's different, but otherwise, just keep doing what you're doing.
• For me, despite objectively being in great shape ($1.6M invested, $60K expenses) I still find myself sometimes worrying about money.  Focusing on gratitude rather than anxiety doesn't come naturally for me, but it's absolutely worth practicing.

[Laura33]

How do you all structure these sinking funds? Do you target a fixed amount and then replenish if you dip into it? Or do you typically just put a set amount aside monthly and let it grow if you don’t need it?

Let it ride.  The whole point is to have that $30K for a new roof ready to go when the roof fails. 

You can, of course, adjust the amount of the transfers over time.  If you're 5 years in and the sinking fund just continues to grow, you may have overestimated those unusual costs, so you can cut back on contributions.  Or if you're constantly clearing it out, then you clearly didn't budget enough and should up the monthly transfers.  But the point is to smooth out the impact of those periodic "lumpy" expenses by converting them to regular monthly ones, so you don't need to fret about where you're going to get $15K when the deck needs to be redone. 

[RWD]

I don't have sinking funds. I've set up a tiered approach instead. In my checking account I keep enough funds to cover the next month of expected expenses (mortgage, car payment, utilities, credit cards, etc.). Anything extra gets swept tot savings. In the savings account I keep a buffer of about 3-6 months of expenses. If a particular month is higher than expected I can instantly pull from the savings back to checking to cover shortfalls. In the example of a $15k expense the savings account would be sufficient to cover it. Excess savings gets swept to a brokerage account and gets invested. In the case of an extreme expense I can sell off mutual funds to cover it within a few days.

[K_in_the_kitchen]

I don’t like the term emergency fund for monies that are set aside as income replacement in case of job loss, so we always ran those as two separate funds until we realized we didn’t need an income replacement fund anymore because we are FI and should DH lose his job, we’ll go immediately into RE.  But if we did need an income replacement fund, in your situation I would consider that untouchable unless there was an emergency so unimaginable that you depleted your emergency fund and still needed more money.

So then you have the emergency fund.  How much you should have in there depends on what you think your most expensive emergency might be.  For a lot of people, that might be a roof replacement or redoing the main water line or main sewer line — something that needs to be taken care of immediately.  I wouldn’t deplete this to do home improvements, but if the emergency fund and income replacement fund are both full and you have extra, that’s when I would do home improvements. Except — sometimes a fence falls somewhere between a home improvement expense and an emergency expense.  In our case, we have dogs, so a wind event that destroyed our fence would be something we’d need to repair/replace ASAP.

As for the deck, we finally tore ours out (paid the teenager at the time to pull out the pylons) and had concrete stairs and a concrete patio poured.  We wanted a one and done solution that will last the life the rest of our lives with no maintenance needed other than cleaning.

[Bee21]

I understand your unwillingness to touch the emergency funds. I wouldn't touch it for a backyard project either.

You are in great shape financially and based on what you wrote this deck/garden project is a lifestyle expense, you can afford. The value it adds is difficult to assess, so you are a bit reluctant to fork out the money. I get that.

How bad it is now? Will you be using the space more if it was nicer? Will it increase the value of the property or it's a wash? Will it add considerably to the quality of your life?

How long will it take you to save 15k?

last year we needed 30k for a lifestyle expense(don't ask, I am still pissed off about it). We decided to defer it a bit and save up agressively. I continued the retirement contribution, but stopped investments and paid the minimum on the mortgage until we saved up. We were so motivated, that it didn't take that long, living on a bare bones budget for a few months.

 I am glad we didn't touch the efund for that, as other things happened as well, which qualified as emergency. You never know.

[MDM]

Do the recommendations in Investment Order seem applicable to you, and if so where are you in that hierarchy?

Yes, I’ve studied that post and try to follow the order. I kind of consider myself on step 8.

0. 10 month emergency fund in cash.       
1. No 401k match at my company (it’s a startup).
2. Debt free except a 2.99% mortgage.
3. Not eligible for HSA
4. Already maxed Roth for the year (both mine and my wife’s).           
5. I’m not quite maxing my 401k. I’ll contribute about 50% of the limit this year. The investment options aren’t great in my employers 401k.
6. Mega backdoor Roth not applicable (I don’t think).
7. Debt free except a 2.99% mortgage.
8. Just made it to this step earlier this year and started putting anything extra in a taxable. Negligible amount at this point.

Re: The investment options aren’t great in my employers 401k.

See Expensive or mediocre choices.  How bad are your options (even "mostly bad" 401k plans may have one or two good ones, such as  an S&P 500 index) and what does that wiki suggest for your specific situation?

[Telecaster]

The size of the emergency fund is personal choice.    There is a kernel of wisdom in the recommendation to have a cash emergency fund.  For example, let's say you believe you need 10 months expenses.  If your emergency fund is in 100% equities, there could be say, a 20% market drop at any time, and now you only have eight months.    One the other hand, if you go say, four years without an emergency maybe now you have 14 months expenses, which is much safer.

Since the size of the fund is arbitrary anyway, I keep all my emergency fund in equities, except for a couple months cash for irregular but non-emergency expenses.  Like the water heater going out.

In your case, you may consider getting a HELOC but don't tap it.  Then pay cash for the improvements.     If you do have a greater than $30K emergency, then you can tap the HELCO.  If you don't, then you don't have an unnecessary interest expense.