For me, frugality is a never-ending game of optimization. I’m always looking for ways to either cut costs or get more out of my money. This leads us to do weird things like cancelling the newspaper, cancelling the cable, buying wood stove pellets instead of rabbit litter, and either riding a bike or taking a bus to work. (ed: Self hyper-linking skills are on fleek) The way I’ve forced myself into this position over the years is by promising to always increase our monthly savings as measured in Quicken.
From the time Marge and I moved in together, our savings plan has basically been this: Force a certain amount of savings per month by using automated investing. Money disappears from our checking account before we even notice it was there, and it escapes to a investment vehicle where it goes to work for us. The investments happen on a weekly basis to maximize dollar-cost averaging.
We started this back in 2006. I arbitrarily picked $1,000 as a savings goal for the month. When it became clear that this was too easy a hurdle, I pushed it up to $1,500 a month. Once we hit that goal for three months in a row, we increased it $100. And we’ve followed that model ever since. The amount of monthly forced savings has increased $100 or more every three months.
Now we are at $4,000 a month. As you can tell, I’ve found this method to be really effective. Every few months, we have to optimize, because the money just isn’t there! The savings must be found.
To be honest, some of this is only short-term savings. Some of the savings are used as a DIY escrow account to pay for our property taxes and home insurance, or if we owe any income taxes at the end of the year. All other expenses flow through the monthly expenses and count against that $4,000 number.
And since months can be lopsided, I sometimes have to push expenses ahead a month or two in Quicken, or push income back, to make that average savings goal appear. Funny math, but you get the picture. Regardless, that monthly savings goal is being forced into savings using automatic investments either through our workplace retirement plans or Vanguard accounts every month. If there is a temporary cash shortfall, I keep $3,000 as a buffer in a savings account.
Then every once in a while, there’s a monkey wrench thrown into the works. We get three paychecks instead of two. A tax refund. Some unexpected income shows up and I’m at a loss of what to do with it. And we are having some of those days again. Oh, joyous days!
It looks like April is going to have excess cash well over our $4,000 forced savings goal. We have rent money rolling in now, and our big rental property expenses are accounted for, so we will have about $1,500 in excess cash “fun money” in April. In May and June, it looks to be even larger amounts since there will be an extra paycheck in each of those months, and possibly a retroactive pay raise. So what should I do with the excess cash?
Retirement Savings: You’d think this would make the most sense. But right now we have our automatic retirement savings set to max out just at the end of the year, and putting more into them now would muck up the math.
Pay Down Debt: There’s less than $3,500 left on our student loans, and though their combined interest rate is only 2.375%, it’s very tempting to just pay them off and be rid of those monthly payments.
Stocks: Not the most tax-advantaged decision, but I like to buy a stock now and again. I actually haven’t purchased any since 2014 (Royal Bank of Canada and Lending Club) so maybe it’s time.
The Wellington “Black Box”: We have some money in a taxable account at Vanguard in the Wellington Fund in what I like to call a “black box.” I always wanted to have a fund that acted purely as an income-producing machine. One that we are never allowed to sell shares of. I can only put more money into it, and receive the dividends that it pays out. I picked the idiosyncratic Wellington for this job. It is one of the oldest mutual funds in the country, is very reliable, is balanced between stocks and bonds, and makes a nice gift of dividends and capital gains show up in our bank account every Christmas. The Wellington balance is only a few thousand dollars. I have to be careful of what I add to it, because I can never take it out again.
Rental Property Savings: Of that $4,000 monthly savings, about $1,400 goes into the money market mutual fund / emergency fund to pay for future expenses. This is the DIY escrow I was talking about. I would also use this account for a down payment on a hypothetical second rental property. This might be the “smartest” use of the excess cash, since the cash flow generated by the down payment on another rental property is bigger than the return on the other investments.
What I usually do in these situations is divy up the excess cash to serve a few different tasks. Right now I’m thinking of hitting those student loans hard, putting a good amount in rental property savings, and putting some in stocks or Wellington, because those are the most “fun.”