Author Topic: Question about irregular expenses, for those who have already FIREd  (Read 4964 times)

AlwaysBeenASaver

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I'm just about to FIRE. I have my budget, withdraw plan, etc. all in order. But this morning I started wondering, some of the items in my budget are irregular - meaning they won't occur every month, but are included in my expenses because they will occur now and then and I don't want a surprise.

For example, medical, which is one of the larger ones. I budgeted $1000/month. My premium will be less than half that, but the 1000 is to include deductible and copays as well. So what I started wondering is, if I don't have any major medical incidents right away, that's going to pile up in my checking/savings, earning negligible interest. I'm wondering what people who've been FIREd for a while are doing about this type of occasional expense? Ideas I've had are:

- Don't pull it out of my investments with my regular expenses, leave it invested until I need it.
- Put it into a short term bond fund or Ally savings to get slightly more interest.
- Set a limit for how much I'll let sit in checking/savings, after I get to the limit, then stop pulling it out of my investments with my other expenses.

Anyway, I'd like to hear how other FIREd folks have dealt with this.


arebelspy

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #1 on: June 04, 2015, 08:11:32 AM »
I am planning on a combination of all 3.

Healthy reserves for my rentals, mostly kept in money market accounts (#2), with a cap on how much there is and contributing to investment accounts after that, and pulling from investment accounts if the irregular expense is larger than what's in my regular account (#3).

I am not planning on amortizing them, and pulling out a little bit each month to set aside though. I plan on leaving as much of it invested as possible (#1).
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Exflyboy

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #2 on: June 04, 2015, 08:30:08 AM »
I am currently running about 1.5 years of expenses in cash (about 1 year in actual checking accounts). Whatever my expenses are I intend to pull from this pile first whether it be $35k or 50k.

In theory even if I got cancer and had to fork out an extra $15k for a round of chemo, replace a car, roof etc, there should be sufficient in my cash reserves before tapping bonds.

I never "Plan" to sell stocks.. In other words when I sell them will be independent of expenditure.. Now if we get the big Earthquake on the West coast then all bets are off..:)

Patrick A

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #3 on: June 04, 2015, 08:41:56 AM »
Now if we get the big Earthquake on the West coast then all bets are off..:)

Off topic, but yeah -- I just bought my first house (also in Oregon) and and realllllly hoping that the cascadia subduction zone doesn't do any violent "subducting" in the near future. 

Financial.Velociraptor

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #4 on: June 04, 2015, 01:32:25 PM »
I go with no emergency fund.  Emergency expenses go on 1.5% cash back credit card.  Card is paid off immediately with a margin loan from my broker (1.6% annual).  If I repay the loan in less than a year, I come out ahead on cash.  If it takes longer my net interest cost is negligible. 

forummm

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #5 on: June 04, 2015, 03:12:22 PM »
I go with no emergency fund.  Emergency expenses go on 1.5% cash back credit card.  Card is paid off immediately with a margin loan from my broker (1.6% annual).  If I repay the loan in less than a year, I come out ahead on cash.  If it takes longer my net interest cost is negligible. 

So you can be 100% (or more) invested and just withdraw cash from your IB account without having any cash sitting there?

Tyler

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #6 on: June 04, 2015, 03:43:14 PM »
IMO, there are two fundamental issues in the OP question: cash, and budgeting. 

I personally addressed the cash issue by accounting for cash (I prefer short-term treasuries) in my asset allocation.  I'll never have to sell assets I don't want to. 

As for budgeting, I prefer to not live so close to the SWR line.  Plan your regular known expenses well below your preferred WR, and you'll have a lot of financial flexibility for irregular expenses up to your normal WR with no stress.  Maybe it's a medical bill one year, and a fun trip the next.  Basically, budget an overall buffer large enough to absorb most anything that comes up rather than try to account for every low-probability event as a line item each year.

Frankies Girl

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #7 on: June 04, 2015, 03:51:16 PM »
I'm mostly the same as ExFlyBoy; savings account with a large buffer.

But I do mostly put things on my credit card that has the bonus points and then pay it off each month. We have an enormous amount of credit so that lets us charge just about anything (earn $ back) and then figure out how we want to pay it over the next month.

We actually have two savings; one is our immediate expenses account (and sort of our emergency fund), readily accessible in a brick and mortar bank with our checking account. Another savings account is our long term one at an online bank earning better interest, holding around 1 year of expenses. I also have a tiny bit of cash in my investment accounts (technically it is for "dry powder," but it's a fraction of a percentage point right now and probably getting invested shortly).

We have the long term and the short term/ER roughly set to hit a specific amount for each. If we end up with extra $ it gets swept over and invested, if we spend it down, we'll top it up by selling off some investments only if it goes under a certain percentage (same principles as rebalancing investments).

I am technically not budgeting any specific amounts for things like car insurance, medical/insurance, vet bills (all those irregular items). I am aware of roughly how much, and where in general they'll hit during the year, but I will pull from whichever bucket makes the most sense when they are due. In the meantime, I will continue to fund whatever investments I planned to fund, save up whatever amount I planned in savings, and just stick to the general plan.


Financial.Velociraptor

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #8 on: June 04, 2015, 04:43:17 PM »
I go with no emergency fund.  Emergency expenses go on 1.5% cash back credit card.  Card is paid off immediately with a margin loan from my broker (1.6% annual).  If I repay the loan in less than a year, I come out ahead on cash.  If it takes longer my net interest cost is negligible. 

So you can be 100% (or more) invested and just withdraw cash from your IB account without having any cash sitting there?

Close to it.  I keep a couple thousand in checking just so I don't bounce checks (all my bills are on cc and cc does an automated etf from checking each month).  So, I'm basically 99% invested at all times.  Arguably more if I have a short term loan out but its usually trivial.  I only borrowed about 1500 to replace a/c last summer for example.

AlwaysBeenASaver

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #9 on: June 04, 2015, 10:03:26 PM »
Thanks for all the responses, I'll have to consider all of these more carefully!

DoubleDown

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Re: Question about irregular expenses, for those who have already FIREd
« Reply #10 on: June 09, 2015, 10:29:34 AM »
Our HELOC has been really useful in this regard. I use it if I need a large amount of cash that is not already on hand, and then pay it back at the optimal time (for example, withdrawing an asset during rebalancing or that I want to get rid of for whatever reason, and to minimize any taxes or transaction fees for selling assets). The rate is low, and floating a couple of months costs next to nothing. As an example, borrowing $10,000 against it at 3 - 4% APR for 3 months would cost no more than about $130 in interest. That amount is easily offset by minimizing taxes and maximizing investment gains.

I did this just last month to sell a rental home that needed about $8000 in upgrades/repairs to get market-ready. Borrowing $8000 for about 2 months at 3.x% costs very little and is not even noise in the scope of the sale, and I can pay back the HELOC after settlement (got an offer on the house just last night).