Budgeting: Where to park earmarked funds for large annual purchases

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Bayareatechie
Posts: 10
Joined: Tue May 14, 2019 11:37 pm

Budgeting: Where to park earmarked funds for large annual purchases

Post by Bayareatechie » Wed Jun 12, 2019 9:12 am

Recently we've started tracking monthly income and expenses to get a better picture and to have more control over where money is going. Would love some critique and suggestions regarding the following plan for where to park money for large annual expenses that would otherwise blow apart the budget for the month incurred. For example, for us those are things like property tax payments, school tuition, and car purchase (this one's not annual :P, but similar idea).


Goals, roughly in priority order:
  • Earning something, but doesn't have to be a lot. These will be short-term investments by definition
  • Safe, but not necessarily riskless - we can easily cash flow the difference if we fall slightly short
  • Separated from rest of account - so we can easily see where the money allocated without tracking a balance in a spreadsheet somewhere
  • Tax-efficient: we're in highest federal bracket and in CA. This is not earning a ton of interest so low in the list
  • Automated so we don't have to think about it

We "bank" with Schwab, so most conveniently this money would be in Schwab. Currently putting this money in bond funds, with automatic investments each month. The convenient thing about this is we don't have to think about it - it feels like an automated bill payment to ourselves. These are the funds on the shortlist:

SWAGX: Schwab U.S. Aggregate Bond Index Fund
SWCAX: Schwab California Tax-Free Bond Fund
SWNTX: Schwab Tax-Free Bond Fund

For variable savings such as car, looking at money market fund, which doesn't have an automatic investing option:
SWVXX: Schwab Value Advantage Money Fund


Would like feedback on:
  1. How do experienced monthly budgeters approach budgeting annual items?
  2. Any downsides to be aware of about holding these types of bond funds short-term?
  3. Are these good fund choices for this purpose? Any recommendations?

onourway
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Joined: Thu Dec 08, 2016 3:39 pm

Re: Budgeting: Where to park earmarked funds for large annual purchases

Post by onourway » Wed Jun 12, 2019 9:19 am

I manage our budget tightly enough I typically have cash on hand for most large purchases 6-12 months in advance. That money simply accumulates in the Vanguard Prime Money Market fund. I don't choose a bond fund both because I prefer to not have a variable balance on this money, and anything other than the shortest of terms introduces the risk of taking a loss at time of withdrawal. If your tax status warrants it, you may consider a one of the state specific money market funds.

For things like cars, etc. they are paid for from our regular brokerage account. Typically a purchase like that can be deferred if the market is having a rough time.

Living Free
Posts: 284
Joined: Thu Jul 19, 2018 7:31 pm

Re: Budgeting: Where to park earmarked funds for large annual purchases

Post by Living Free » Wed Jun 12, 2019 9:21 am

Bayareatechie wrote:
Wed Jun 12, 2019 9:12 am

SWAGX: Schwab U.S. Aggregate Bond Index Fund
SWCAX: Schwab California Tax-Free Bond Fund
SWNTX: Schwab Tax-Free Bond Fund
I think you'd need to calculate the tax equivalent yield for those to see which is best for your situation. Because I presume you're holding these in a taxable account. Another option is to hold your bonds/cash in your tax deferred accounts: https://www.bogleheads.org/wiki/Placing ... ed_account

would also look at the duration of those bond funds as that would also affect the price volatility and I presume you want lower volatility with these investments.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Budgeting: Where to park earmarked funds for large annual purchases

Post by dbr » Wed Jun 12, 2019 9:27 am

I keep money for that sort of thing in my investment portfolio. When the money is needed either stocks or bonds can be sold according to what drives the asset allocation toward balance. It is also not uncommon that enough income accumulates as cash from months with low spending that there is an excess in some money market fund or savings account to slosh back into spending. I wouldn't say something like property tax qualifies as an issue. I can see how tuition payment for children in college might. The last time we bought a car we took that year's RMD at the time and spent it on the car. Otherwise I take RMD at the end of the year, withhold taxes as needed, and reinvest the money in taxable holdings.

This sort of thing has never seemed to be a problem that needs some sort of special planning, but again college expenses could be an issue if you have that.

MJD
Posts: 21
Joined: Sat Aug 04, 2018 6:17 pm

Re: Budgeting: Where to park earmarked funds for large annual purchases

Post by MJD » Wed Jun 12, 2019 9:40 am

I prefer to use a high-yield (high-yield in this environment) savings account for these types of expenses. I use Discover (~2% APR if memory serves) - I have heard good things about Ally. Similar concept, I also keep other money in a Vanguard money market fund (slightly higher return than Discover) that is meant for annual vacations....I only do this so that "play" money is kept quite distinct from Discover (which is emergency fund/larger annual/semiannual bills).

Discover limits you to 6 outward transactions per month without penalty, but we haven't had any problem staying well below that.

I have chosen not to use any type of bonds for this purpose because I'd prefer not to have variable balances with the share value swings since I know for certain I need the money in a shorter time frame.

For a larger purchase like a car, I suppose I'd have to fund it through a mix of the savings account and selling some stock/bond assets.

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