Planning For The Predictable & The Unpredictable

A reader asks:

How do you plan for major expenses, and is there any rule of thumb we should use when saving for a home, and a wedding? Also is it okay to use our Roth IRA accounts to save for a home?

The average wedding in the U.S. is estimated at more than $33,000 so unless your parents are ponying up for a great party, this is definitely a major expense.

My wife and I talk about how if we had to do it over again we would opt for a smaller wedding without as many people to save money. But try telling that to someone going through this experience for the first time. Whether it’s a good investment of your money or not, most people want a memorable wedding and reception, which is not cheap.

The way I think about major expenses is you have to treat them like they’re part of your regular budget.

Most people should do this for all sorts of larger, but infrequent spending needs. If you break them up into smaller savings goals you soften the blow when the “surprises” actually hit. You shouldn’t be forced to tap into your emergency savings every time your car breaks down or your house needs to be repaired.

In fact, I’m not a huge fan of having an “emergency” savings account in the first place. Most people who have an emergency fund dip into it far too often, and for expenses that most certainly aren’t emergencies.

I am a fan of having a goals-based spending plan that takes into account the fact that life comes with both predictable and unpredictable expenses.

Everyone knows they’ll eventually have to pay for car repairs, insurance premiums, housing maintenance, Christmas presents, etc. but because these expenses are infrequent most people don’t budget for them. Out of sight out of mind until they actually hit and then people end up scrambling to pay them off.

The same applies for big one-time purchases such as a down payment or wedding. Treat them like a monthly expense and save for them on a regular basis. I don’t know the exact amount people should save because everyone’s dream house or wedding will be different.

The only thing I can say with a high degree of confidence is almost everyone underestimates their costs for both so build in a margin of safety in your calculations. And the biggest margin of safety often comes from planning ahead for these things by carrying them on your monthly budget so you can chip away over time.1

Obviously, few people have the ability to simultaneously save for a down payment, dream wedding, retirement, and other financial goals. Sometimes you have to prioritize shorter-term goals over longer-term ones to make your dreams a reality. Finances almost always come down to trade-offs.

I could throw some big numbers at you to show how much you’re missing out on compounding by spending tens of thousands of dollars on a wedding but the truth is you can’t put a price on experiences.

However, if you do spend extravagantly on a wedding through regular monthly installments, don’t waste those savings habits once you’ve reached your goal. Immediately roll that money you were saving into your retirement savings or other long-term goals that took a backseat for your major expense.

This works for people repaying their debt as well.

For example, I graduated college with around  $20,000 in student loans. Fifteen years or so later, I’ll be making my final payment on these loans in the next few months. I lucked out since student loan rates were ridiculously low (around 2.6%) when I consolidated them so I didn’t see the need to pay it off in advance.

But I’ve still had an automatic payment go out every month which will stop when the balance is paid off. I could always pocket that money but I’ve already been paying it much like a bill for so long that I might as well do some good with it since I never had the money to spend in the first place.

So when those loans are paid off I’ll simply take that same monthly amount and tack it on to my automatic transfer to my investment accounts.

The worst thing you can do after developing good savings habits and reaching your goal is to allow those habits to go to waste by treating that money as fair game for spending purposes.

It’s like losing 20 lbs through good diet and exercise, only to revert to your old ways that got your overweight in the first place.

Further Reading:
Personal Finance is Personal

1You do have the ability to withdraw your contributions from a Roth tax and penalty free but you would likely have to account for any gains you made in the meantime. I like to keep these things simple and use my online savings account for short-term goals but that’s just me.

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