Where do you put your sinking fund?

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Xaran
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Where do you put your sinking fund?

Post by Xaran » Sun Aug 04, 2019 5:22 pm

DW and I bought a house at the beginning of this year. It is in good condition, but I know there are things like replacing carpet, repainting, etc, that will probably have to be done before we eventually sell. I am the type who likes to save up for these types of expenses ahead of time. Our income is good, but not so good that I feel like I can just pay out thousands of dollars for these things when they come along. We also would like to have our current vehicle be the last one that we have to take out a loan to pay, and be able to pay cash when it comes time to purchase our next vehicle. I've looked to see if there are other threads about this on the forums here but my search skills haven't yielded much on this particular topic (edit: probably because I didn't know the jargon "sinking fund" for it, thanks firebirdparts).

So that made me wonder, what do people on this forum do for these type of situations? Do you put it into a money market account like you would for your emergency fund? Or do you have somewhere else you like to put it? Include it in your overall AA and just sell when you need to fund something? I'm just looking for ideas. I've thought of things like putting it into a Vanguard Tax advantaged balanced fund or Wellesley to a MM account or not having things separate and just have it as overall part of a 3 fund portfolio. What are people's suggestions?

Xaran
Last edited by Xaran on Sun Aug 04, 2019 7:35 pm, edited 1 time in total.

jebmke
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Re: Saving for future expenses

Post by jebmke » Sun Aug 04, 2019 5:29 pm

I don't make any special accounting. Generally we deal with things as they come. My initial retirement budget had a plug for one significant unidentified item every year.

As an aside, we moved a lot during my working years. I always budgeted about ~10% of the house purchase price for various fix-ups in the first 12-18 months. In other words, when figuring out how much house we could afford, I added in 10% for "stuff that needs to be done in the first year." Obviously, when you look at houses, that can change - it might need more. I've never needed less - always something, drapes, landscaping ....
When you discover that you are riding a dead horse, the best strategy is to dismount.

firebirdparts
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Re: Saving for future expenses

Post by firebirdparts » Sun Aug 04, 2019 5:30 pm

The jargon for that is sinking fund. Investments usually match the time horizon, which these days might mean 0% real return and less. You could debate what parts of the house the emergency fund can be used for. You could also debate how much your taxable portfolio could tolerate a payout given a reasonable warning.

[edit] I forgot to tell you what I do. I save up for things after they are identified. We DIY everything so we can cash flow a lot of jobs.
Last edited by firebirdparts on Sun Aug 04, 2019 6:54 pm, edited 1 time in total.

Ron Ronnerson
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Re: Saving for future expenses

Post by Ron Ronnerson » Sun Aug 04, 2019 6:38 pm

One thing I do is try to do is stretch out the life span of things I buy to help minimize the cost on an annual basis. We tend not to replace things just because something new becomes available. We just take the money out of our savings/emergency fund when expenses come up. Those savings are held in high-interest checking accounts at Orion Credit Union (currently earning 4%). However, I churn checking and savings accounts to get a higher return on our cash. Over the past three years, we’ve earned $11k in interest (closer to $9,500 after taxes) on our emergency fund (which is typically somewhere in the mid-five figures). Most of the interest has been a result of bonuses from opening new accounts. The interest we’ve been generating should help fund our next batch of appliances, many of which are due for replacement fairly soon.

To summarize, our approach is basically this: buy things infrequently, keep money in an emergency fund to be able to buy those things when needed, and maximize the returns on the emergency fund so that the interest earned can largely cover the expenses that come up.

Topic Author
Xaran
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Re: Saving for future expenses

Post by Xaran » Sun Aug 04, 2019 7:40 pm

firebirdparts wrote:
Sun Aug 04, 2019 5:30 pm
The jargon for that is sinking fund. Investments usually match the time horizon, which these days might mean 0% real return and less. You could debate what parts of the house the emergency fund can be used for. You could also debate how much your taxable portfolio could tolerate a payout given a reasonable warning.

[edit] I forgot to tell you what I do. I save up for things after they are identified. We DIY everything so we can cash flow a lot of jobs.
Thanks, I've updated the title of the thread. Knowing the jargon helps the search better, though there doesn't seem to be a whole lot of questions on this that I could find still.

Overall it seems that people generally consider it part of their emergency fund, and save in whatever vehicle they are using for that, though not everyone does this. Currently I have half my emergency fund in my Vanguard MM account and the other half in Wellesley for more growth potential, though I know that's probably a controversial way to do it. I add more into the Wellesley portion every month as part of my emergency/sinking fund. There could be better ways to do it then Wellesley in a taxable account, I'm sure. I'm looking at whether it would be worth it to switch to something more like a mix of TSM and a muni fund since it's in taxable. I haven't had the stuff in Wellesley long enough to where I would take a big tax hit if I sold at this point, so just trying to get some ideas of how I might do this better than I currently am.

TravelforFun
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Re: Where do you put your sinking fund?

Post by TravelforFun » Sun Aug 04, 2019 8:13 pm

I don't have an emergency fund, my saving account has approximately one month of expenses. All our money are in Roth IRA, traditional IRA, or taxable. If we need to spend a couple of thousands on something, I would charge it to my credit card for points and pay off when the statement arrives. For larger purchases, we sell some stock funds or bond funds from either the traditional IRA or taxable account to get to get the momey. Since we're over the age of 59.5, IRA withdrawal penalty doesn't apply to us.

TravelforFun

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iceport
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Re: Where do you put your sinking fund?

Post by iceport » Sun Aug 04, 2019 9:35 pm

It's doesn't seem to be discussed here often, but I think your described use of a sinking fund is an excellent idea!

While I was working I did pretty much the same thing. I had a stable job, so I allowed my sinking fund to double as an emergency fund. I was content for a long time using my credit union's savings account, which always had competitive interest rates. That is no longer the case. (Well, the rates are still competitive for a savings account, but there are now better options.) Now I put the fund in Vanguard's prime MM fund (currently yielding ~2.26%) and/or the riskier Vanguard short term corp. bond index (current yield ~2.49%, avg. duration ~2.5 years). (In truth, this pot of money has been re-purposed, since my retirement, as a house renovation fund that will probably be tapped over the course of a few years. This helps me justify the use of the bond fund instead of a true cash equivalent.)
"Discipline matters more than allocation.” ─William Bernstein

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willthrill81
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Re: Where do you put your sinking fund?

Post by willthrill81 » Sun Aug 04, 2019 9:40 pm

Historically, a 30/70 AA has been no more volatile than one comprised of 0/100 (assuming total bond market or intermediate-term Treasuries), so I think that that's a pretty good starting point, and you can achieve that pretty closely with Vanguard's Wellesley Income fund. If you absolutely can't take on any risk of short-term capital loss, then a high-yield savings account or money market are probably some of the best bets these days.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dru808
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Re: Where do you put your sinking fund?

Post by dru808 » Sun Aug 04, 2019 9:45 pm

I’ve wondered about this for a while, I think I’m going the route of Wellesley or target retirement income. I figure I may as well make some return on it, If it falls a bit I’m not to worried since there’s not a specific date I will need the money and it’s not my emergency fund.

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Bluce
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Re: Where do you put your sinking fund?

Post by Bluce » Sun Aug 04, 2019 9:47 pm

I keep money for my estimated tax payments (self-employed), property taxes, other big expenses, etc. in a regular ol' MM fund.

I do not count this as part of my investment portfolio (it is not used to buy securities) and (IMO) nobody should. :shock:

tony_roach
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Re: Where do you put your sinking fund?

Post by tony_roach » Sun Aug 04, 2019 10:22 pm

For small/short term sinking funds I established a couple of additional savings accounts with my local bank. They were easy to open online from my account portal and I use them to keep things like car repair, vacation sinking funds. This is easy for me for these short term needs and I keep my emergency fund in a money market with Fido.

IowaFarmWife
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Re: Where do you put your sinking fund?

Post by IowaFarmWife » Mon Aug 05, 2019 7:03 am

My sinking funds are divided among different accounts, depending upon when I need them. For instance, my life insurance policies are due every three months, so I just keep the money for the premiums in the checking account. For money that I will need to access only once a year, such as my property tax payment, I keep in a high yield savings account and withdraw it at tax time.
“The quickest way to double your money is to fold it in half and put it in your back pocket.” —Will Rogers

mancich
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Re: Where do you put your sinking fund?

Post by mancich » Mon Aug 05, 2019 7:10 am

We keep money in Capital One online savings and Ally. We have a “main” emergency fund, then 4 or 5 other sub accounts, such as House, Vacation, Christmas, and Estimated Taxes (wife has 1099 income in addition to her main job). It may sound like I am making things complicated, but this little bit of mental accounting works for me.

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Nate79
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Re: Where do you put your sinking fund?

Post by Nate79 » Mon Aug 05, 2019 7:51 am

We have a nice healthy 6-12 month emergency fund that would soak up any short/mid term needs that come along without needing to borrow money. Beyond that I throw everything into total stock market index fund as a sinking fund for purchases >5 years out (like car purchase, etc).

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Re: Where do you put your sinking fund?

Post by bloom2708 » Mon Aug 05, 2019 7:58 am

tony_roach wrote:
Sun Aug 04, 2019 10:22 pm
For small/short term sinking funds I established a couple of additional savings accounts with my local bank. They were easy to open online from my account portal and I use them to keep things like car repair, vacation sinking funds. This is easy for me for these short term needs and I keep my emergency fund in a money market with Fido.
+1

It takes 5 minutes to create another savings account (local or online). Give them nicknames. Car Fund, Vacation Fund, House Fund, Taxes Fund, etc.

Give each dollar a purpose. Send it to work. Some dollars work harder/longer than others. Dollars spent soon don't have to work as hard (earn as much interest).

Some have a single account but still give each dollar a purpose in a spreadsheet. Do what works best.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

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Sandtrap
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Re: Where do you put your sinking fund?

Post by Sandtrap » Mon Aug 05, 2019 8:14 am

Xaran wrote:
Sun Aug 04, 2019 5:22 pm
DW and I bought a house at the beginning of this year. It is in good condition, but I know there are things like replacing carpet, repainting, etc, that will probably have to be done before we eventually sell. I am the type who likes to save up for these types of expenses ahead of time. Our income is good, but not so good that I feel like I can just pay out thousands of dollars for these things when they come along. We also would like to have our current vehicle be the last one that we have to take out a loan to pay, and be able to pay cash when it comes time to purchase our next vehicle. I've looked to see if there are other threads about this on the forums here but my search skills haven't yielded much on this particular topic (edit: probably because I didn't know the jargon "sinking fund" for it, thanks firebirdparts).

So that made me wonder, what do people on this forum do for these type of situations? Do you put it into a money market account like you would for your emergency fund? Or do you have somewhere else you like to put it? Include it in your overall AA and just sell when you need to fund something? I'm just looking for ideas. I've thought of things like putting it into a Vanguard Tax advantaged balanced fund or Wellesley to a MM account or not having things separate and just have it as overall part of a 3 fund portfolio. What are people's suggestions?

Xaran
My entire portfolio is my safe passage through the journey of retirement.

Becaused my fixed allocaiton is diversified with varying degrees of liquidity, it is the "sinking fund".

j
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GreatLaker
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Re: Where do you put your sinking fund?

Post by GreatLaker » Mon Aug 05, 2019 3:30 pm

Before retiring I did not have a sinking fund. I just spent on items like that from normal cashflow or workplace bonuses, and cutting back on other discretionary items like hobbies and vacation if necessary.

When I retired I started a sinking fund. I estimated cost and lifespan for car, roof, driveway, HVAC and major appliances, and allocate a set amount per year to fund that. I keep my sinking fund in a low-fee tax-efficient balanced mutual fund in my discount brokerage cash account. I'm in Canada and the fund I use is Mawer Tax-Effective Balanced Fund (MAW105).

Ferdinand2014
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Re: Where do you put your sinking fund?

Post by Ferdinand2014 » Mon Aug 05, 2019 7:07 pm

Xaran wrote:
Sun Aug 04, 2019 5:22 pm
DW and I bought a house at the beginning of this year. It is in good condition, but I know there are things like replacing carpet, repainting, etc, that will probably have to be done before we eventually sell. I am the type who likes to save up for these types of expenses ahead of time. Our income is good, but not so good that I feel like I can just pay out thousands of dollars for these things when they come along. We also would like to have our current vehicle be the last one that we have to take out a loan to pay, and be able to pay cash when it comes time to purchase our next vehicle. I've looked to see if there are other threads about this on the forums here but my search skills haven't yielded much on this particular topic (edit: probably because I didn't know the jargon "sinking fund" for it, thanks firebirdparts).

So that made me wonder, what do people on this forum do for these type of situations? Do you put it into a money market account like you would for your emergency fund? Or do you have somewhere else you like to put it? Include it in your overall AA and just sell when you need to fund something? I'm just looking for ideas. I've thought of things like putting it into a Vanguard Tax advantaged balanced fund or Wellesley to a MM account or not having things separate and just have it as overall part of a 3 fund portfolio. What are people's suggestions?

Xaran
I tend to keep things as simple as possible. My IPS is essentially to save enough cash to sleep well and the rest in a low cost S&P 500 fund (FXAIX) bought every month. All of my cash is stored in a taxable brokerage account as 4 week treasury bills and Fidelity treasury only money market fund (FDLXX). The amount of cash is an X dollar amount equal to 1 year of EF and any anticipated lumpy expenses like car, remodel projects, etc. My FXAIX fund is mostly in my SEP, DW 403b and rollover IRA with some also in taxable. My IPS calls for me to maximize my SEP and 403b and match that in taxable with cash as needed for expenses in rolling 1-3 year periods with the extra going to FXAIX in taxable. 2 funds. No rebalancing ever needed. No AA to fiddle with.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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AerialWombat
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Re: Where do you put your sinking fund?

Post by AerialWombat » Mon Aug 05, 2019 7:28 pm

I have neither emergency fund or sinking funds. It’s all just one bucket, called “taxable brokerage account”. It’s all held in one fund. “Money is fungible,” as someone will inevitably point out.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Bluce
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Re: Where do you put your sinking fund?

Post by Bluce » Mon Aug 05, 2019 7:34 pm

I've never heard the term "sinking fund" before this thread.

I'm assuming it means a checking, savings, or MM account (i.e. cash), but why the switch in names? :confused

IowaFarmWife
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Re: Where do you put your sinking fund?

Post by IowaFarmWife » Mon Aug 05, 2019 7:47 pm

Bluce wrote:
Mon Aug 05, 2019 7:34 pm
I've never heard the term "sinking fund" before this thread.

I'm assuming it means a checking, savings, or MM account (i.e. cash), but why the switch in names? :confused
It's just another form of budgeting both short and longer term goals. I have sinking funds for vacation, Christmas, birthday presents, property taxes, car taxes, insurance payments, etc.

https://www.thebalance.com/sinking-funds-2385686
“The quickest way to double your money is to fold it in half and put it in your back pocket.” —Will Rogers

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Bluce
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Re: Where do you put your sinking fund?

Post by Bluce » Mon Aug 05, 2019 8:08 pm

IowaFarmWife wrote:
Mon Aug 05, 2019 7:47 pm
Bluce wrote:
Mon Aug 05, 2019 7:34 pm
I've never heard the term "sinking fund" before this thread.

I'm assuming it means a checking, savings, or MM account (i.e. cash), but why the switch in names? :confused
It's just another form of budgeting both short and longer term goals. I have sinking funds for vacation, Christmas, birthday presents, property taxes, car taxes, insurance payments, etc.

https://www.thebalance.com/sinking-funds-2385686
Thanks, but it all seems to be semantics to me. The word "sinking" does not seem to be correlated with any of this -- I guess that was my main question.

FWIW: I've never made out a budget in my entire (long) life. I've always lived simply, and below my means, so maybe that's why the idea never meant much to me. :confused

Carry on! :mrgreen:

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iceport
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Re: Where do you put your sinking fund?

Post by iceport » Tue Aug 06, 2019 12:18 am

Bluce wrote:
Mon Aug 05, 2019 8:08 pm
IowaFarmWife wrote:
Mon Aug 05, 2019 7:47 pm
Bluce wrote:
Mon Aug 05, 2019 7:34 pm
I've never heard the term "sinking fund" before this thread.

I'm assuming it means a checking, savings, or MM account (i.e. cash), but why the switch in names? :confused
It's just another form of budgeting both short and longer term goals. I have sinking funds for vacation, Christmas, birthday presents, property taxes, car taxes, insurance payments, etc.

https://www.thebalance.com/sinking-funds-2385686
Thanks, but it all seems to be semantics to me. The word "sinking" does not seem to be correlated with any of this -- I guess that was my main question.

FWIW: I've never made out a budget in my entire (long) life. I've always lived simply, and below my means, so maybe that's why the idea never meant much to me. :confused

Carry on! :mrgreen:
I've long been familiar with the term and think the concept makes enormous sense for large anticipated expenses. But, like you, I never really understood the etymology of the term. I always had this vague mental image of some sort of hopper that gets filled slowly over time and then drained periodically. Your comment motivated me to look it up.

If Wikipedia is to be believed, there's a more interesting (or less literal?) origin:
Borrowing money by issuing a bond is referred to as floating a bond. Sinking is its opposite, repaying debt or acquiring capital assets without debt.

https://en.wikipedia.org/wiki/Sinking_fund

Aha! :beer
"Discipline matters more than allocation.” ─William Bernstein

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Bluce
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Re: Where do you put your sinking fund?

Post by Bluce » Tue Aug 06, 2019 7:41 am

iceport wrote:
Tue Aug 06, 2019 12:18 am
I've long been familiar with the term and think the concept makes enormous sense for large anticipated expenses. But, like you, I never really understood the etymology of the term. I always had this vague mental image of some sort of hopper that gets filled slowly over time and then drained periodically. Your comment motivated me to look it up.

If Wikipedia is to be believed, there's a more interesting (or less literal?) origin:
Borrowing money by issuing a bond is referred to as floating a bond. Sinking is its opposite, repaying debt or acquiring capital assets without debt.

https://en.wikipedia.org/wiki/Sinking_fund

Aha! :beer
Thanks! Makes a little more sense now. :sharebeer

It just goes to prove the old quip: "You're never too old to learn." I'll be 69 in two weeks and this is all new to me. :(

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