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How to Save Up for Big Expenses

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How to Save Up for Big ExpensesI’ve got a question for you today – how do you save up for big expenses? A big lump sum expense is one of the reasons why people go into debt. Most people don’t save up for big expenses and they just get a loan to pay for it when necessary. This would work as long as you have steady income and can pay off the loan in a reasonable timeframe. However, many people keep buying more stuff and got stuck in a debt spiral. We really shouldn’t buy if we can’t afford it.

Debts are bad

I hate debt. It really bugs me to send off a payment every month. I’d rather pay upfront and avoid worrying about the monthly payments. We had car loans in the past and it was such a huge relief to our budget whenever they were paid off. I could put the $350/month into our stock investment instead of sending it off to the bank. Also, it feels great not having a car loan over our heads. That’s why we paid cash the last time we purchased a car.

Currently, the only debts we have are the mortgages on our home and rental properties. I don’t like the mortgages either, but the interest rate is low and I like investing in the stock market. At least we don’t have other consumer debt like car loan and credit card debt.

How to save for big expenses

Here is the classic way to save up for big expenses.

  1. Figure out how much it will cost.
  2. Figure out how long you have.
  3. Start saving.

So if a used car that you’re eyeing cost $15,000 and you have 4 years to save, then you’d need to save $417/month. That’s $15,000/36. This should work for most big budget items, but there are other alternatives too. Let’s look at some of our pending big ticket expenses and see how we’ll save for them.

Upcoming big expenses

Currently, we have 3 months of expense in the bank as our emergency fund. We spend about $4,500 per month so $13,000 is a pretty good cushion.  This fund shouldn’t be use for pending big expenses, though. We might have an emergency at the same time so it is better to save explicitly for these things below.

Property Tax – $15,000

Our property tax bills are due in November and we pay it off once per year. This one is pretty easy because we’ve been dealing with it every year. We add about $1,250 to our main saving account every month. By the time the property tax is due, we should have enough cash to pay them all in one shot. Property owners save 3% by paying the tax bills in full. By November we need to have $28,000 (emergency fund + property tax) in the bank and we are on track for this one. We may have to dip into our emergency fund a bit, but I think that’s fine for property tax.

The $15,000 tax is for three properties.

A newer car – $15,000

Our low mileage (48,000 miles) 2010 Mazda 5 is still running well so this one is a low priority for us. We probably should start saving once the car is over 12 years old, though. I’ll budget $15,000 for a newer vehicle and save $417/month until we reach that goal.

The thing about this one is that we might not need a newer car for a long time. What if I just put $15,000 in GM stock (or another automobile company) and see how it goes. When we need a new car, we can pull the money out. If the investment didn’t do well, we’ll just have to buy a cheaper car. On the other hand, we could get a nicer car if the investment was good. What do you think about this plan?

By the way, the image at the top of the post is the upcoming Tesla Model 3. Wow, I like the styling. It looks very futuristic. Nice, but out of our price range because it starts at $35,000.

20th Anniversary party – $5,000 to 10,000

We got married at the courthouse in 1999 and didn’t have a wedding. This was mostly because planning a wedding was too daunting for us, but the saving was nice too. It’s ridiculous that a wedding cost over $30,000 nowadays. I figured we’ll have a big party to celebrate our 20th anniversary instead of spending a ton on the wedding. Being married for 20 years is a much bigger accomplishment than getting married…

This is a big budget celebration, but it is cheap compare to a wedding. The reason it is so expensive is because we want to have it near Santa Barbara, where we went to college. We’ll rent out a huge house for a week and invite close friends and family to come celebrate with us. It’d be great if we could throw a fun dinner party for them too. We could get catering or book a big party at a nice restaurant or hotel.

That’s the idea, but I’m not sure if it can be done. A big house with room for 18 people cost $8,000 per week. I don’t know how much a big catering dinner would cost, but it’d probably eat up the rest of our budget. I’ll start polling our friends and families to see what they think. It might be more convenient to just book a big place for the weekend. After the celebration, people can get their own hotel or Airbnb if they want to stay longer. That’s the low end of the budget.

Our around the world trip in 2021 – $50,000

Here is my plan. We’ll take a year off to travel around the world when RB40Jr finishes 4th grade. We will “road school” him during 5th grade and he can start 6th grade at the junior high school when he gets back. Isn’t that an awesome plan?

My budget for this trip is $50,000. That’s about how much we spend per year at home and I think it is a good budget for a year on the road. I checked a few travel blogs and the figure seems reasonable. We’ll also stay with families and spend a good amount of time in cheaper countries.

Saving this much cash would be tough, but I have an idea. We’ll sell our condo before we leave, save $50k for travel, and invest the rest. When we get back, we’ll move into our rental house. That’s a great idea, right?

Save Save Save

Wow, we have quite a few big expenses coming up. They are spread out a bit so we could concentrate on one at a time. I’ll focus on the 20th anniversary first, then the RTW trip, and lastly a new car. This makes them a bit more manageable. We don’t have to save for all these things at the same time.

What about you? Do you have some big expenses coming up? Do you save up for them or just finance them when the time comes?

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{ 78 comments… add one }
  • Sam @ Financial Samurai June 1, 2017, 3:24 am

    I’m impressed with the size of your property tax bill Joe. Is that the full annual payment? Or half the annual payment? In CA we have two tranches to pay. Hope it is the full annual.

    Property tax is one of the main reasons why I don’t want to own any more physical real estate. It’s getting onerous to pay so much to an inefficient local government!

    Sam

    • retirebyforty June 1, 2017, 9:21 am

      That’s the full annual payment for 3 properties. I’m sure you pay a lot more than that.
      Yeah, I’m not quite happy with the local government either. We just passed a big school bond so the tax bill will go up this year. Can’t complain too much, though. One of the school being renovated is in our neighborhood.

  • Budget on a Stick June 1, 2017, 3:31 am

    We do something similar with our property taxes. I direct deposit 1/26 of the total every paycheck into the same account as the emergency fund.

    We also just got done saving for our baby leave. I calculated about how much we would need to save in order to avoid putting from the emergency fund for the next 24 weeks.

    • retirebyforty June 1, 2017, 9:23 am

      Great job! I hope you have a good leave. I took a leave when our kid was born and it was awesome.

  • Pennypincher June 1, 2017, 3:37 am

    Wow, your property taxes are high. Take a good look at them and you’ll see most of it goes to the schools-very costly to run.
    My taxes are high too, but I refuse to move to a lower tax area to live. I don’t want to live where everyone else wants to live, just to save on taxes. There’s a downside to some of these places, and it’s not for me.
    “Being married 20 years is a much bigger accomplishment than getting married.” Right on!

    When you have your car choices narrowed down to 2 or 3, call your insurance company and ask how much to insure each one, you’ll be surprised at the difference in costs. That should help w/your decision. : )

    • retirebyforty June 1, 2017, 9:25 am

      Yeap, we just passed a big school bond. Our kid is in school now so we can’t complain. Once our kid is out of school, we may move to a location with lower taxes.
      I’ll check with insurance. We’d probably get some kind of wagon and insurance is usually pretty good on those.

  • Mustard Seed Money June 1, 2017, 3:42 am

    In VA we have to pay property taxes in two tranches as well. Speaking of which I have an upcoming bill in June. I honestly usually forget about it each year which isn’t good but I have enough of a safety cushion that it normally isn’t a big deal.

    Now I want to take that $50k trip around the world. Do you know all the spots that you want to go? Also what is R40Jr. response? I’d love to do that but I’m curious as to the response you got from your child.

    • retirebyforty June 1, 2017, 9:27 am

      It is still a few years off so we haven’t talked about it yet. He likes travel so I don’t think it’s a big deal. That could change as he get older, though.
      I’d like to visit Eastern Europe, SE Asia, Australia, and New Zealand. We haven’t nailed it down yet.

  • Financial Coach Brad June 1, 2017, 4:04 am

    Are your property taxes $15k or $28k? Both numbers are listed there.

    Regardless, that’s a LOT of money. Our property taxes are only about $1500/year. I’m very thankful they aren’t as high as there!

    • retirebyforty June 1, 2017, 9:28 am

      The tax is $15k, but we need to maintain our EF too. So it’s $13k + $15k.
      Wow, $1,500/year! That’s dirt cheap..

  • Mr. Need2Save June 1, 2017, 4:07 am

    We haven’t taken on any new debt in over 10 years (car loan before that). We’ve been able to pay for our last few cars in cash, all vacations are saved up for in advance, and other expected large bills (e.g. car insurance) are also saved up for over the year.

    Every month we sock away anticipated medium term spending into our Captial One 360 savings account. Then we just use a simple spreadsheet to reconcile the overall balance into categories. We typically put aside $600 a month for future car costs, $300 a month for car insurance (we have two teenage sons! although they pay some of the cost), $300 a month for vacations, etc. We will also do extra contributions when we get our yearly bonuses.

    • retirebyforty June 1, 2017, 9:30 am

      It’s been a while for us too. I love not having to send out these monthly payments. It free up our budget so much.
      $600 per month for future car costs. That’s great! You guys are paying a lot for insurance. I’m not looking forward to that. Maybe we’ll go with car sharing when our kid is driving age…

  • I think your plan to fund your trip around the world is awesome! Aligning it with the sale of your condo and plan to move into your rental might be a challenge (and a little bit stressful) but the income stream will certainly fund the trip! We are in the middle of a downsize now and working on aligning the sale of our home to move into our rental too.
    I think 4th or 5th grade is a great time to do the trip for RB40Jr. too. Missing the first year of junior high would be tough as expectations change (but it would be do-able too). What memories you will create for your family!

    • retirebyforty June 1, 2017, 9:32 am

      You’re right about the extra stress. I need to talk to the missus about this. Properties are moving very quickly now so I haven’t thought about this issue. JD Roth sold his condo in one day!
      6th grade is the first year of Jr high school for us. We’ll see how it goes. Maybe we can go in 4th grade instead.

  • Barb June 1, 2017, 4:13 am

    Wow…I am struck by how expensive your property taxes are too! We live in Austin, Texas in a modest house valued at about $360,000 and our property taxes are about $4,500 a year. That is with living in a sought after area with excellent schools too. We moved here from Massachusetts which has lower real estate taxes but Texas doesn’t have a state income tax so it is probably a wash.

    • retirebyforty June 1, 2017, 9:34 am

      That’s for 3 properties so it’s high and getting higher. It seems a bit more expensive than Austin.
      No income tax is nice. We have high state income tax and high property taxes…

  • livelovelaugh June 1, 2017, 4:15 am

    I always like your articles.
    As long as I think of the pain when paying for higher maintenance fees for expensive cars, I’d rather drive RAV4.
    “Road schooling” for a 5th grader is a bit late. By the 5th grade, school work is getting serious.
    While you are on the year long trip, have you think of renting out your apartment?
    Anniversary celebration? Congratulations! It’s exhausting thinking of the catering. Here’s what I will do. I will have a new set of nice gold rings, plant another investment account (money tree) and have a nice gateway, like staying at Disney’s Grand Floridian…

    • retirebyforty June 1, 2017, 9:36 am

      We had a BMW in our 20s and I hated paying the maintenance. It was so expensive. No more luxury car for us.
      No, our HOA made it hard to rent out. The rent wouldn’t cover the expense anyway. It’d be easiest to just sell it.
      I’ll talk about the anniversary with the missus. We both like the idea of a big celebration with friends and families. I’m sure they could contribute a bit.

  • Lucas June 1, 2017, 4:45 am

    $15,000 a yr in property tax? Gosh. I think the advice should be for you not to own a property in this case. I would never pay all this in taxes. I rather travel and rent.

    • retirebyforty June 1, 2017, 9:36 am

      Yeah… It’s a bit expensive. That’s for 3 properties. I updated the main post.

  • Ms. Frugal Asian Finance June 1, 2017, 4:49 am

    Early congratulations on your anniversary! 20 years is such an amazing number. Mr. FAF and I have been married for only 3.5 years, but I feel like it’s been such a long time!

    Mr. FAF and I hate debt too, even the mortgage. We have no consumer debt either and are trying to pay off our mortgage asap.

    I LOVE to your travel plan. It sounds so exciting!! I have never thought of homeschooling our so before, so it’d be great to see how it goes with RB40 Jr. Best of luck with all of the plans you mentioned above! 🙂

    • retirebyforty June 1, 2017, 9:38 am

      We’re okay with mortgages. We could invest more instead of putting all the money in the house. The primary residence is not a good investment.
      Thanks! I’m really looking forward to the RTW trip.

  • Grant @ Life Prep Couple June 1, 2017, 5:10 am

    http://www.lifeprepcouple.com/pay-yourself-a-car-payment/
    We just automatically draft out a hundred dollars a month and invested in 50/50 stock bond split with Betterment for saving for a car. Both our cars are in pretty good shape right now but why wait to start saving when you know they will eventually need to be replaced?

    Other stuff depends on the time line. Down payment on next house we also have going to a different 50/50 Betterment account. HOA, Taxes and Insurance stuff goes to a regular savings account.

    Also that 20th anniversary idea sounds awesome.

    • retirebyforty June 1, 2017, 9:38 am

      Nice. I like your idea. Saving $100 per month isn’t that hard.

  • Mrs. Groovy June 1, 2017, 5:15 am

    It’s strange to think that you can spend the same amount of money on a car as your property taxes! I’m not surprised. We have one friend in NY paying over $30K in proerty taxes and believe me, he’s not in a swanky location.

    Your plans are exciting! I like the idea of selling your condo before you set off around the world. Not only will the sale provide the cash for your trip, but you’ll avoid paying all those home expenses you’d need to cover even while away.

    • retirebyforty June 1, 2017, 9:41 am

      Okay, I guess our property taxes are high. 🙂 Maybe we need to move to a cheaper location.
      I like the idea of selling our condo too. Less property taxes when we get back. 🙂
      The home expenses is nearly $30k/year. It’s pretty ridiculous.

  • nicoleandmaggie June 1, 2017, 5:32 am

    I do, but I don’t go “here’s the amount we need to save each month to make this happen.” Instead I front-load it and have an amount that we will need to have in savings by the end of May (when I get my last paycheck for the school year). If we’re not on track by March, then drastic steps need to be taken. If we’ve saved, up enough, then the excess each subsequent month often (but not always) gets redirected. Then in October (when I get my first paycheck of the school year) if there’s money leftover from what we need for the next May, I redirect it.

    Lately with DH’s company situation being uncertain, instead of redirecting after we’ve hit savings goals, I’ve been letting it just pile up into savings. That way we can enjoy his job break rather than having to worry about money.

    • retirebyforty June 1, 2017, 9:43 am

      I like front loading. That’s a good idea. Previously, we just go into extra saving mode when we need the extra money. We went without a car for 3 months before we paid cash for our current one.
      Good luck with DH’s company.

  • Mrs. Picky Pincher June 1, 2017, 6:21 am

    Awww, congrats on the upcoming 20 years! That’s quite an achievement, especially if neither of you have strangled each other yet. 😉 As far as saving for big expenses, our strategy has always been to live leaner than usual and bank as much money as possible. That means we freeze overpaying on our debts, cut out A LOT of stuff, and try to make some extra cash (I do freelance writing to help).

    • retirebyforty June 1, 2017, 9:44 am

      It hasn’t always been a smooth ride, but we’re comfortable with each other now. 20 years is a long time.
      We used to live lean to pay for the big expenses too, but it’s probably a better idea to save up earlier. 🙂

  • FI3000 June 1, 2017, 6:22 am

    Like you I hate borrowing to buy anything that isn’t an investment so I generally just keep a five figure amount in our savings account that acts both as an emergency fund and big expense savings account.

    • retirebyforty June 1, 2017, 9:45 am

      That’s a good way to do it. Having some cash for emergency is a great way to protect yourself.

  • Money Beagle June 1, 2017, 6:24 am

    For recurring costs like the tax bills and such, we’ll divide out the expected amount and make 1/12 of the deposit into a sinking fund. Then, it’s there when the bills are due.

    For non-recurring large purchases, we’ll often use any tax refund we might get as a way to kick start the fund.

    • retirebyforty June 1, 2017, 9:46 am

      I forgot about the tax refund. We should get it soon!

  • Mike H. June 1, 2017, 6:40 am

    A few thoughts:

    – I’m impressed by your foresight when it comes to property taxes. Not owning a house, I’m pretty happy that I don’t have to deal with all the hassle at this point in my life.
    – Not all debt is bad. Debt for a depreciating asset, like a car or a washing machine = bad. Student loans, mortgages = depends on the interest rate. I’m a big believer in arbitrage, so I didn’t even mind my low-APR car loan.
    – If you put your money into GM stock and use the final value to buy a car, are you comfortable paying the taxes on both the investment gains AND the car purchase when the time comes?
    – A trip around the world sounds awesome, but having Jr. miss a year of school might have social repercussions. Maybe this is a cultural thing, but where I grew up there was a lot of continuity in the kids you saw each year, and new kids had trouble adjusting. Still, a trip around the world…
    – Congrats on 20 years!! My advice: talk to an event planner who works out of Santa Barbara (I was just there last year. It’s a great place!), give him/her your budget, and ask what options are on the table.

    • retirebyforty June 1, 2017, 9:49 am

      I think the low APR car loan is personal. I just don’t like sending a big check out to the bank every month. It could work for some people, though. As long as you don’t spend too much on a car.
      Hmm.. Good point about taxes.
      Missing one year of school would be tough, but he’ll just have to live with it. Lots of kids move around a lot more often. It shouldn’t be a huge deal at this age. Maybe we’ll go a year earlier. That will make it simpler.

      • Pennypincher June 2, 2017, 10:42 am

        Joe, about the trip ATW w/Jr. Colleges don’t count grades (monitor them) until high school, so you should be ok, grade wise w/Jr.
        Tip, don’t ever tell your kid that colleges only count grades from high school on-ha,ha!

        • retirebyforty June 2, 2017, 11:25 am

          Thanks for the info! Everything goes into the permanent record. 🙂

  • Lazy Man and Money June 1, 2017, 6:51 am

    Wow, there’s a lot going on this post. One way to save for some items would be the Dobot app. It’s like Digit that you’ve mentioned here, but money goes to a specific goal… and it’s still free. I don’t know if I want to put $15,000 or more with them though.

    We were able to 0% financing on one car and around 2% financing on another. It’s cheaper than our mortgages. In a raising rate environment, we probably can’t do that on the next car in 2025, but maybe we’ll be taking automated cars through an app by then ;-). I’m not a fan of investing in one car company. It feels high risk for something that feels like an emergency fund-type expense. If you were looking to invest it in Vanguard Star, I would find that more interesting.

    I’m interested in the “road schooling” plan. I’d love to do something similar, but we’d probably just do it over a summer. Truancy laws are pretty tough in my area and it seems like having a good reason and a good plan doesn’t cut it.

    Instead of selling a condo (unless that’s really the plan anyway), what if you pulled out $10,000 from your investments each year? Or saved dividends? It seems risky to need to sell at a particular time.

    • retirebyforty June 1, 2017, 9:51 am

      Thanks for the feedback. I don’t think it’s a great idea to invest in one car company either. It is so cyclical. When the stocks are high, the car price is high too.
      We’ll see about the condo when the time comes. If the market cools down that much, maybe we could rent it out instead. Housing is moving really fast here at this time so I’m not going to worry about it right now.

  • Roseanne June 1, 2017, 6:52 am

    Hi Joe,
    You need one little edit on the year you got married – it’s missing one digit. How wonderful to be thinking of a 20 anniversary party. I think the week in Santa Barbara sounds fabulous, but the trip around the world sounds even better. I have a 100 mile drive every day, so I really put the miles on my automobile. I would love to get the Tesla or even the Chevy Bolt but alas they are both out priced for me. Love reading your articles!

    • retirebyforty June 1, 2017, 9:53 am

      Thanks for catching that. I was really struggling last night. 🙂
      I found out that the Tesla depreciates very quickly. The model S loses 50% in just a few years. Maybe a used Model 3 would be affordable in a few years. I bet the maintenance would be very expensive, though…

  • Full Time Finance June 1, 2017, 6:56 am

    Usually we save up front if the expense is sizable enough. Living as if we’re paying for it already until it arrives. Alternately I time them around bonus time period with the caveat that I will hold off if the bonus does not cover the expenditure. In the last 3 years we’ve: put a new roof on our house, installed a new septic system, replaced an HVAC system, and replaced a car. In the foreseeable future our known big expenditures are travel.

    • retirebyforty June 1, 2017, 9:54 am

      Great idea about the bonus. Alas, we don’t have that bump anymore. 🙁
      We need to replace our HVAC too…

  • Ms. Montana June 1, 2017, 7:13 am

    Prop tax for all 3 of our homes are less than $5000 a year. But we have a lot of vacation homes around here that help carry the load. 🙂 I love the big stuff you are saving up for! I think the anniversary party is an awesome idea, and way smarter than a pricey wedding. Plus just imagine if people invested that 30k for 20 years instead of spending it on the wedding! Now that would be a heck of a party! And I love the round the world trip idea. I’ve thought about it but timing is tricky. I would want my youngest to be at least 7, but would hate for the older kids to miss high school years. Well, we’ve got a few years to figure it out…and save up for it!

    • retirebyforty June 1, 2017, 9:56 am

      Wow, I’m jealous of the property taxes. Now, I feel bad about paying so much compare to everyone else.
      The RTW trip is much easier with one kid. Much less trouble to deal with. 🙂 I wouldn’t want our kid to miss high school either. I think 4th or 5th grade is still okay.

  • Laurie June 1, 2017, 7:22 am

    I love your plan to travel the world during your oldest kiddo’s 5th grade year! That’s really similar to what we’re thinking of doing, moving internationally during our oldest’s middle school years (’cause who wouldn’t want to skip middle school?) and then come back to the US and let him do high school here. Where are you guys planning to start the trip?

    • retirebyforty June 1, 2017, 9:57 am

      We’ll probably head west and starts with Hawaii. Not sure yet. I need to research the weather a bit more. We’d like to avoid cold winters so we don’t have to pack so much.
      Where are you thinking about living for a few years? That sounds interesting too.

  • freebird June 1, 2017, 7:52 am

    Just the big ER for me, and hard to get a loan on that. Come to think of it I’ve never taken out a loan in my life so I have no idea how to do such a thing.

    Since I started in my early 20s, I was done with saving many years ago. But even though I’m not consciously setting aside money, I haven’t been able to spend what’s been coming in so the checking account grows on its own. Consequence of growing accustomed to simple living, or maybe I’ve gotten too old to enjoy it!

    I’m still looking to buy a house or condo inside one particular square block that I’m targeting, it’ll be a cash purchase using money I set aside years ago. Nothing on offer there for quite some time, we’ll see if something pops loose this summer.

    • retirebyforty June 1, 2017, 10:04 am

      Yeap… Tough to get a loan for retirement. 🙂 A reverse mortgage is the only thing I can think of.
      Good luck with finding a condo.

  • Mr. Tako June 1, 2017, 8:33 am

    I pay cash for pretty much everything Joe. We *could* have purchased our house with cash, but it made more financial sense to get a low interest mortgage.

    Basically my strategy has always been to get the snowball rolling first, and spend later. That is, I invest every bit of cash I can, and then let the market/dividends grow. Meanwhile, I put off spending on big expenses as long as I can.

    Eventually, the portfolio just grew to the point where I could pay cash for things like a house.

    • retirebyforty June 1, 2017, 10:05 am

      Right. I’m okay with a low interest mortgage too.
      Putting off big expenses is a great idea. I like it.

  • Iexpedite June 1, 2017, 8:35 am

    I have a couple of places I stick money. I have a regular checking account and a secondary account I call the buffer account. I know what my monthly expenses average out to be over the course of a year. Taxes, Birthdays by Month, Christmas, Pet Vet bills, travel, fuel, water bill, medical expenses, home improvement that sort of thing. Any bill I have that comes up once per year or fluctuates month to month gets added up and divided by the number of pay periods I will have for the year. The goal is to not go through the feast or famine that we used to endure. The money is divided up on a spreadsheet by the categories they pertain to. When February rolls around I have 5 birthdays I deduct from the February birthday category and add the money to my regular checking account. The money doesn’t physically move it is always kept in my regular checking account but it is moved on my spreadsheet from its buffer category to the checking side.

    My long term savings is everything that isn’t buffered or required for regular living. My monthly spending budget is tightly controlled. I budget each regular spending category like groceries or the cable bill, or insurance. Once the regular spending categories are funded the remaining funds go to long term savings.

    The nice thing is we always have money. On pay periods when we overindulge and run out of money we aren’t down and out. We put some buffered gas in the car and go. We spend some money from the buffer on a house project we had our eye on. We do some Christmas shopping. It is hard to explain here but it has worked wonders for us. It is a big reason we were able to retire early.

    • retirebyforty June 1, 2017, 10:46 am

      That sounds complicated, but really awesome. The buffer account is a great idea. You’re making it work and that’s what counts.

  • Kevin @39months.com June 1, 2017, 8:38 am

    Wow, $15K for property taxes! I thought New Jersey was bad (it is).

    We do something similar, we figure out what we’ll need and set it aside into savings to pay.

    For our next auto (hopefully not for a while) we are putting away money into savings for that (both some for me and some for my wife). I am hoping that when I achieve financial independencein 37 months, to get more involved in real estate and get a used pickup truck as my primary vehicle.

    Good topic

    • retirebyforty June 1, 2017, 10:47 am

      Yeap… Now I’m jealous of the low property taxes in other parts of the country. I didn’t realize we’re paying much more than others.

  • mary w June 1, 2017, 11:50 am

    I’m a much different age than you and fully retired. There are two different types of “large” expenses. 1/Yearly ones which I try to spread out throughout the year with only one a month (i.e., property tax, car insurance, house insurance, quarterly taxes, etc). Not all the same amount, but it does smooth it out. 2/one-off expenses (new to me car, new roof, kitchen remodel). Most years there seems to be one of these. The bond portion of my portfolio consists of zero coupon muni bonds with one maturing every year.

    It should be noted that I have several rental properties so insurance, roofs etc. happen more frequently.

    • retirebyforty June 2, 2017, 8:55 am

      Thank you for sharing your strategy. Having some bonds sounds like a good idea when you’re retired.

  • The Grounded Engineer June 1, 2017, 11:52 am

    We keep a healthy emergency fund of 6-7 months of expenses. In addition, we started saving for a new car and a vacation. This money is in our Ally Savings account that returns a whopping 1%.

    The rest of our money goes heavily into investments. We started a taxable account that we could use to tap into if needed. The other thought we are debating is paying off the mortgage aggressively versus investment into our taxable. The latter provides more liquidity, but also has more risk.

    • retirebyforty June 2, 2017, 8:56 am

      That’s a big emergency fund, nice.

  • Friendly Russian June 1, 2017, 12:53 pm

    We do have small saving funds for car, vacation and so one and for now we keep this money in a simple online Savings account with 1.05%. We don’t use a separate account for each goal, I don’t want to have a lot of small accounts and manage them.

    BTW, I notice that you do simple division for figuring out a monthly amount you need to set aside, which is OK to do, you might find our way more efficient. We use a Savings Calculator, that helps to figure out the exact amount we need to set aside for a goal.

    Let’s say we have to buy a $15,000 car in 5 years. And we keep our money in a savings account with 1.05%APR. In this case instead doing simple math 15,000/60 = 250 we use a calculator that takes all the data and says that instead of doing $250 a month we need to save $243 every month. Or if we put $500 as our first deposit we need to save $235.05 every month.

    When you have several long term goals it helps to find more money in the budget that can be invested or used for other needs.

    The Friendly Russian

    • retirebyforty June 2, 2017, 8:57 am

      That’s interesting. I didn’t think the 1.05% APR would make a big difference, but every little bit counts.

  • Tim Kim @ TubofCash.com June 1, 2017, 1:38 pm

    Joe, pretty jealous about your planned 1 year trip, that sounds awesome. And $50K for a 1 year trip around the world doesn’t sound bad at all. My parents live in Eastern Europe (Hungary), and so my wife and I used their place as a launch pad to travel around Europe a few years back before we got our kid. It cost us approximately $15K for a 2 week trip (France, Italy, and Switzerland). We got eurail passes too and it still cost us that much. Granted we did eat out quite a bit.

    • retirebyforty June 2, 2017, 8:57 am

      Wow, that’s expensive for 2 weeks. We went backpacking for 7 weeks in Europe and I think it cost around $10k. That was in 2003, though….

  • Smart Provisions June 1, 2017, 3:59 pm

    Wow, those property taxes are high! But for three properties, that doesn’t seem so bad.

    Have you considered churning and signing up for some credit card offers to try and reduce some costs on the RTW trip?

    In terms of saving, I’m a bit on the other side of the spectrum and tend to like loans better if I can get 0% interest on them. Otherwise, I’d do an upfront payment instead. The only thing I won’t be able to do this for would be a mortgage though.

    • retirebyforty June 2, 2017, 8:58 am

      Yes, we are trying to do some of those credit card deals. However, we don’t spend that much money so it’s tough to meet the minimum spending. Mrs. RB40 also hates signing up for a new card.

  • Mr. All Things Money June 1, 2017, 4:34 pm

    Only a 3-mo emergency fund? I don’t feel comfortable with anything less than a one full year of emergency fund. I guess it’s different for everybody and their situation.

    There was a recent study done in UK on how people feel if they have cash in the bank. They found that liquid wealth is indirectly associated with life satisfaction and the effect persisted even after accounting for investments and higher salaries.

    Here is the link to the article and the study: https://personalfinancenews.com/importance-of-cash-on-hand-to-life-satisfaction/

    • retirebyforty June 2, 2017, 9:00 am

      Mrs. RB40 is still working so we have a steady income stream. Once she retires, then we’ll increase our EF to at least 6 months.
      Thanks for the link.

  • Buckeye girl June 1, 2017, 6:32 pm

    I am rather OCD on budgeting so that drove my decision on how to handle periodic large expenses. I established a secondary savings account for personal property taxes and for insurance. Every month I transfer funds from my checking to these 2 accounts. I budget in Mint. In that way taxes and insurance show up as a monthly expense and gives me a truer picture of our monthly expenditures. I tried to do something similar to that for vacation, but I found it too administratively cumbersome.

    I would be admonished on how i handle the other big one-time expenditures such as a car or major home repair. I like to have ample cash such that we can handle anything that is thrown our way. Yes – that means not all of our money is fully employed; but there is a value to having the peace of mind that we can handle whatever life throws at us.

    • retirebyforty June 2, 2017, 9:01 am

      I think that’s awesome. 🙂 You have to do whatever works for you and not worry about what other people think.

  • Craig June 1, 2017, 11:44 pm

    My parents saved for all their cars through investments. That way they always paid cash for all their cars. That’s what I’m thinking about doing for my family’s next car. I never thought of earmarking one stock for it, but that might be fun to watch grow.

  • Your First Million June 2, 2017, 4:34 am

    This post hits the nail right on the head. Setting aside a specific budget and savings plan is by far the best way to pay for large expenses. We usually travel on 2 or 3 big vacations per year. We have a budget where we set aside a specific amount from each paycheck that goes into our “vacation fund.” By the time our vacation comes up, we have a substantial amount of money ready to pay for the trip. This is so much better than just not saving and putting the trip on a credit card as most people do. It just baffles me how people do it the other way…. using the “I’ll pay for it later” mentality. Not to mention the steep interest they end up paying over the long run.

  • The Tepid Tamale June 2, 2017, 7:13 am

    Not too many large purchases in our future that I would want/need to save up for. If I had a string of unexpected medium expenses they would simply reduce the cash in the emergency fund, and then I would have to tighten the belt more (which would be tough) or invest less to replace that cash. Let’s hope that doesn’t happen!

    The only one I can think of is a car. We are currently a 1 car family, and just recently went down to Florida to buy a car on Craigslist. So I suppose it’s time to do the math, and start saving so we are ready for the next one. My current take on cars is: ‘Lower than needing full insurance’ and ‘Higher than too shitty to be seen in’. This can really be quite inexpensive, actually almost classifying the car as a medium expense. But better, safe than sorry, so thanks for the reminder, I had better get the fund for the next car figured out!

    • retirebyforty June 2, 2017, 9:02 am

      We could pay for those medium size expenses from our EF too. Anything under $5,000 wouldn’t be a huge deal.
      Which car did you buy? Just curious.

  • David D June 3, 2017, 6:08 am

    Like others, we save a bit each month for various categories of spending. We let things build up over time and it always seems to even out over the years. Most of these big expenses are expected. They one-time expenses, like your 1-yr vacation, would be saved for separately from our general vacation fund by setting aside money each month for it. Nothing special, just deligence.

    If it makes you feel better, we are in the state with the highest property taxes and pay thousands more than you do for just one property.

    I look forward to your posts while your vacationing for a year. We just took a month off in April. It was amazing. It took a year to plan that much time away, but was well worth it.

  • Dividend Diplomats June 3, 2017, 10:46 am

    When I was saving for our house, I didn’t have an automated savings each month. Instead, I was pretty strict with this too, I knew that I needed to get to $50,000 in savings for a down payment and costs to cover moving and a few repairs. So I accepted the challenge of transferring money regularly to this account when needed. This allowed me to take a month off if there were more attractive investment opportunities in the market. Or conversely, I could save more when the market was on a tear. I probably ended up saving the same amount, but I wasn’t strict about it.

    With that being said, this is all about to change now that we purchased a home. I will plan for the expenses and automate my savings. I still prefer taking debt for cars since the rates are so low (we just bought my wifes care with a 1.9% rate), but leave the option open to payoff early if we one day value the cash flow instead.

    Thanks for the great read and I cannot wait to implement some of your saving strategies. It can never hurt to start the saving process early, especially for a worldwide trip that will NOT be cheap and you cannot easily pay off your entire trip.

    Bert

  • Revanche @ A Gai Shan Life June 5, 2017, 8:54 am

    That’s a lot of big expenses but they all sound wonderful! 20 years is absolutely more important to celebrate that the wedding itself 🙂

    I especially love your around the world trip – that’s going to be so fun! I hope you’ll be able to share it as you go.

    Also like the idea of dumping the money into a car stock until you need it, though as a buy-and-hold investor, I get attached to my stock 🙂

    It’s awfully costly to rent a big house for 18 people in Santa Barbara for a week but it could sure be a lot of fun – the weekend idea is probably better, though, for hosting the full group. Instead of formal catering, you could check to see what restaurants are nearby that do catering. When I was pricing out catering for PiC’s party, it was going to run about $34 per person, and a total of $500+. I ended up paying half that much for catering from a favorite restaurant nearby.

    I expect our personal prop taxes to cost $12K this year. Our rental is paid through escrow for convenience, but we have to take care of our own taxes. Normally I just cashflow our taxes but this is a larger number than usual. I’ve taken $10K from savings and dropped it into Chase for a bonus, and I think I’ll plan to set that full amount aside to hold for our tax bill which will come up in November and February instead of mixing it back in with my general savings.

    • retirebyforty June 5, 2017, 10:14 am

      I’ll have to work on the SB plan. I’m pretty sure my friends would contribute. If it’s $1,200 each, then that’s not too bad for a week at SB. We’ll see. Thanks for the restaurant tip. I will check that out too.
      Wow, $12k is pretty high for personal property. That’s Bay Area for you…

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