How do you account for big purchases in your budget/cash flow/etc.?

Stacking Pennies recently asked on her blog how she should account in her budget for spending on a new car.   She’s taken out a 0% loan (that she doesn’t need) in order to take advantage of the ability to leverage that money at no risk.  There are also complications involving getting a buyback on her previous car.

She wonders if she should put the 20K in a separate account both physically and mentally as if she hadn’t gotten a loan at all, or if she should incorporate the buyback and payments into her regular budget, and if so, how?

Now, there’s a proper accounting way to answer these questions, using assumptions about depreciating assets and so on, but proper accounting methods aren’t necessarily that helpful in personal finance where we aren’t getting tax breaks on rates of depreciation (meaning you should still do them for rental property or small businesses).

Instead what matters is that you get the information that you need to get a handle on your spending and your savings so that you’re taking care of your future self, saving for things you want to save for, and not penalizing yourself unnecessarily in the now.

There’s no one right way to deal with large lump purchases in your budget.  It’s whatever helps you keep track and make decisions.

I tend to think of things just in terms of my “emergency” fund (really it’s a slush fund since it includes money both for emergencies and for regular lumpy expenses) and how much it is growing or shrinking each month.  Whenever we have to decide on housing expenses like rent or a house purchase I’ll look at the whole fiscal picture and map out what we can afford, but in generally I’m really lazy about keeping track of our money, so just looking at the size of our slush fund each month.  We can do that because in general we spend a lot less than we earn each month.  So in the new car case, the car purchase might deplete our slush fund below levels that I felt comfortable with, meaning more of each month’s excess would need to be diverted to savings, and any monthly car payment would make it more difficult to refill the slush fund.

Another common strategy is instead of having one “emergency/slush” fund is to have specific separate accounts.  So car spending would come out of the “car” fund and anything not accounted for with the car fund would have to come out of the actual “emergency” fund (or luxuries fund or what have you).  Then you’d take into account the inflows and sizes of each of those accounts each month.  This method is similar to my lazy method but allows for more control.  You can better fine-tune your monthly spending and tracking of monthly spending so that you don’t have to have such a big gap between your take-home income and your spending.

How do you account for vehicle purchases (both with and without loans) in your budgeting?

27 Responses to “How do you account for big purchases in your budget/cash flow/etc.?”

  1. anandar Says:

    We have separate “emergency” and “planned big spending” accounts– the latter broken down into many sub accounts for different goals. If we had to buy a new car before the car spending account is large enough to cover it in full (which happened when my old car got totalled), we’d take from the e-fund. I have to keep reminding myself that in a true emergency, we’d divert some of our many targeted spending accounts, because they don’t feel “available” to me. (Our planned spending account is much larger than the e-fund.) Emotionally I would prefer a larger e-fund, but I don’t want to keep that much $ in cash.

    • nicoleandmaggie Says:

      Do you actually have separate accounts at the bank, or are they separated via spreadsheet?

      • anandar Says:

        They show up on the UX as separate accounts. I feel like you could probably date my consumption of personal finance blogs by this choice, but we use Smartypig (now owned by Sallie Mae), and it is well designed for this purpose– I can tell at a glance what our particular spending goal is, the date we want to hit it, % to our goal, etc. Technically, though, it is really just one savings account.

  2. Leah Says:

    We’ve just got a big efund that’s both emergency and general purpose savings. We bought a car this year and determined our budget by the size of the efund. And then we went over the budget anyway . . . but at least paid off the car quickly. Paying back the efund now to get to a more comfortable number.

    We don’t do the best budgeting/accounting in the world. We’re actually working right now on spreadsheeting all of our spending, obligations, savings, etc so we can have a better picture. Our costs are skyrocketing (as in, doubling) with this next kid due to increased health insurance and daycare, mostly due to quirks in how our employer does health insurance costs.

    • nicoleandmaggie Says:

      Kids and insurance are both really expensive. Doubling is pretty insane.

      • Leah Says:

        Yup. I do feel fortunate because we have paid zero so far for health insurance. It’s because we move tiers up to the “family” level with one more person versus the “employee + child.” So wish we could just have single payer. I know we’d pay more in taxes, but I’d rather than than tied to employment. Why isn’t there more conversation in the media about employer health insurance? We always talk about the marketplace, but that’s not really the majority of people, is it? (note: this might be good for an Ask the Grumpies or even a normal post, perhaps). I can’t believe we don’t think about that in our ideas about competitiveness, markets, etc. It’s weird to me that our little employer is considered a “risk pool” and thus our costs can go up significantly if a few people get really ill.

        It is pricey to have two in daycare. I think our daycare offers a multi-child discount, so I need to look into that so I have accurate numbers for budgeting. Our toddler might also move up to the preschool room (can’t remember the age for that), so I think we pay slightly more per week. I’ll put those on the list of things to investigate.

      • Leah Says:

        And by “zero” I mean no premium. We have a $6k/$12k individual/family deductible. And we max out our HSA.

      • nicoleandmaggie Says:

        The short answer is because you can’t destroy a huge industry especially if it is full of powerful lobbyists. If repubs destroy the ACA and cut tax benefits for employer based insurance, enough of the market may unravel that there’s political will for single payer, but there has to be massive destruction first–the industry is too big and too entrenched.

      • Leah Says:

        Yes, I hear that about single payer. What about uncoupling employer tax incentives? It’s not really a “free market” in the least. Would undoing employer health insurance be good or bad for us? I’m not sure what to hope for . . . would plans become more competitive if everyone had to shop around rather than just people not getting health insurance through work?

      • nicoleandmaggie Says:

        I just answered this on ournextlife in a comment. Basically decoupling if the ACA is destroy will cause a death spiral with even more people losing coverage. Competition doesn’t work in insurance markets the same way as in normal markets because of adverse selection causing market failure. In the archives we have a post about how health insurance is like the used car market. I’ll grab it next time I’m at a desktop. We need pooling because we’re lemons.

  3. Rosa Says:

    Since my husband’s default feeling is that any time the savings account goes down in a month the sky is about to fall, we left it all in one big account but mentally separate it into the base emergency amount and then anything over that is for planned big spending – house repairs, new car, someday maybe a big vacation.

    It’s not the best solution though because really the big-but-flexible spending money should be in a stock account instead of a money market. But it’s an emotional decision more than anything.

    • nicoleandmaggie Says:

      I dunno, I can’t fault him since that’s what we do. I mean, our current aim is 31K in savings as the baseline slushfund. (Though part of this is because I don’t get paid over the summer.)

      • Rosa Says:

        Man hasn’t missed a paycheck since…possibly ever? He got fired once when he was 16 but I think picked up a new job the same week. I’m the save up and then don’t work for a while person. But the number we don’t spend ourselves under is just higher than yours. Six months of bare bones expenses.

  4. gasstationwithoutpumps Says:

    We have a fairly simple system for routine expenses: a personal checking account for each of us and a joint household checking account. We also have a tax-free bond fund that serves as the household savings/emergency/big-ticket fund. Monthly deposits are automatically transferred from the checking account that gets my payroll checks to the bond fund.
    About the only time we take money out of the bond fund is when we have home remodels done, as those are the only times we have to pay more than the monthly cash flow.

    We have a separate 529 account for my son’s college expenses, but it has been doing so well lately that we’ll have surplus in it even after 5 years of paying for college.

    I also have a number of retirement accounts (mostly 403B, but also a Roth IRA and a TIAA account). I probably have too much set aside for my retirement, as I’m on a defined-benefit plan that will end up paying about 80–85% of my current salary, even before Social Security. (2.5% times years of service)

  5. Debbie M Says:

    I keep track in two ways. One is actual spending, where I would subtract the whole cost of a car (since I pay cash). And one I call “lifestyle” spending, where I deduct the amount I need to save each month in order to be able to afford to replace my car on a regular basis.

    Like others, I have a big slush fund but keep track of different needs in a spreadsheet. So after buying a car, I would re-evaluate whether I was saving the right amount for car replacement costs and, if not, adjust my budget at that time. Often after buying a car, I move money between my new car account and my car expenses account, depending on how much I had saved for expenses, how much the car ended up costing, and how much my “new” (used) car is going to need right away to get it to the condition I want it to be in. (Sometimes people sell cars right before they need some obvious repair–and that’s fine because then I get it cheap!)

    In your case, you’ve taken a loan. If I took a loan, I’d say the actual spending would show the down payment and payments rather than the purchase cost.

    The advantage of looking at actual spending is that I am forced to deal with reality! The advantage of looking at “lifestyle” spending is that I get a good look at how my finances are doing, whether nothing big came due that month or whether everything big came due that month.

  6. SP Says:

    I love this statement, because it is exactly how I feel: “proper accounting methods aren’t necessarily that helpful in personal finance.” As long as I understand the true costs of life, I think we’re in good shape.

    There was a point where I contributed a fixed amount per month to a car fund, but I don’t find that useful. Part of it is that we can generate enough cash to replace a car relatively quickly, and a car is unlikely to be a surprise purchase. Also, we could spend a wide range on a car – if our circumstances change for the worse, we’d make a different choice than if we both get huge raises. It seems too arbitrary to set aside earmarked money each month.

    I do have a slush fund, but that is generally for things on the timescale of 1 year or so. I transfer money elsewhere if it gets too far beyond $5k. I have a separate “planned spending” account which is mostly for property taxes since those are harder to cashflow. The car downpayment just came out of the slush fund. Then I have my cash reserves, and a separate “house maintenance” fund, and a separate “target savings” fund that is nominally for (unpaid) maternity leave. This is through CapitolOne360 (formerly ING) so they really all separate accounts under one login. If I every consolidate and optimize my cash, a spreadsheet would also work fine. Even this level of categorization is probably overkill, but it helps me.

    Ramit at IWTYTBR once advocated that people in their 20s should be saving for diapers for their future kids – basically any identifiable future expense should be noted and you should save for it now, monthly. It is great in theory, and it sounds like some people make it work (esp. for cars) – but it isn’t for me. If something is 5+ years away, I don’t think I want to save specifically for that. Then again, I guess I do have lots of “buckets”.

    • Leigh Says:

      On a related note, a friend once suggested I should save for a wedding because they’re expensive. What we ended up doing though is just cash flowing it / paying for it out of slush. It would have been so hard to predict exactly when I would get married and I’m really glad I did it this way.

      • Rosa Says:

        That sounds like you might have wanted a less expensive wedding than your friend, too. Some people want a wedding or car or vacation that can’t really be cash flowed.

        I was saving for a multi month vacation to another country when I got pregnant so that became my fund for taking more than a year off work with the baby. Most of our vacations aren’t the kind to save up for though.

    • nicoleandmaggie Says:

      Money is fungible (mostly), so putting it away for retirement isn’t that different from saving for diapers then since you can always save less for retirement later and buy diapers the (assuming you will need retirement money and are making middle class or higher levels of money).

      Hm, on that example he gives, if they’re already maxing out all their advantaged savings vehicles, it’s likely they would be able to cash flow most of the other expenses he lists. Might as well just save for a rainy day! Or a early retirement.

  7. nicoleandmaggie Says:

    Bonus activism item for today (regular items you can get from any of the weekly list-serves on our activism tab): From Wandsci: Call 202-224-5375 and ask if Betsy DeVos has completed her ethics review. Cloud and I both called and she was told they could call her back, I was told I was being transferred to voicemail but got transferred to nowhere instead.

    I can’t even with this administration’s corruption. But we need them to know we’re paying attention or they will continue trying to get away with everything.

  8. chacha1 Says:

    Without reading the original post, I infer that this question is really: “I had enough cash on hand to buy a car, but was offered a 0% loan. So the bank is paying the car dealer, and I can now either budget repayment of the loan over time, or use the cash that I had on hand to pay it all off at once: which has greater utility?”

    If there is any reason to care about the credit score in this scenario, paying off the loan over time has greater utility because the scoring companies seem to really like it when you make regular payments on something.

    Money is money. If there is enough money in the budget to repay the loan over time, just call the money that *isn’t* being spent on a car something else. Down-payment money, relocation money, job-change aka FU money, or plugging-the-holes-left-when-McConnell-et-al-get-done-gutting-government-programs money. I don’t think there’s much utility in moving the car fund (i.e. opening a new account for it) simply because the purpose behind accumulating it has been accomplished otherwise. Heck, call it “below the line” money, aka Our New Zero, and just act like it’s not there. Can’t think of a downside to having extra money hanging around that’s segregated from the usual income/expense arithmetic.

    I have paid cash for one car and financed two others. The first financed car was handled very poorly (by us) and we overpaid by thousands (lease + years of loan interest). The second one, I just paid off; a six-year loan in 15 months. My plan was “throw every spare dollar at this thing so it’s out of my cash-flow consideration ASAP.” Partly because I want to flip it ASAP, but also so that if I have to jettison the current job there’s one less monthly obligation I have to worry about.

    • nicoleandmaggie Says:

      She’s not trying to decide whether or not to pay the car off–she has decided not to even though she has the cash because she has a 0% interest rate. This is all budgeting and accounting.

  9. bogart Says:

    An unrelated note on activism — I called on DeVos today, but I also got to have a little (albeit perverse) fun making some additional calls, because driving in to work I heard on NPR a discussion of what Trump had “recommended” on replacing the ACA, with one of those being interviewed commenting that it could be interpreted that Trump was advocating extending Medicare to all.

    Obviously preposterous, but keeping in mind my earlier realization that as a constituent I am not required to have a clue or make sense, I called my Republican senator (actually both of them, but got a busy signal from one and did not have time to follow up with other numbers, regrettably) and very sweetly told the staffer who answered that I had heard on the radio that Trump is recommending the ACA be replaced by enrolling everyone in Medicare and that I am just thrilled to hear that and that I hope Senator […] is behind this idea. Why, my late father — may he rest in peace — got many years of wonderful Medicare benefits, and it was so easy, as he went into decline and I was managing his affairs for him, to work with the Medicare system. [Insert several sentences about the difficulty of watching our parents age about here, followed by philosophical musings about shrugging off that mortal coil]. So much easier than my private insurance. And I know my mother loves having Medicare. And my husband’s not that many years from being able to sign up, and we’re just so looking forward to what it will do for us. And …

    Well, you get the idea. It’s actually sort of fun to get to channel my rarely seen (or heard!) inner small talker and to get to ramble on, sweetly yet mindlessly, about how wonderful it would be if we all had healthcare. Horrifically aggravating, of course, that I find myself needing (that we find ourselves) needing to do this, and so much else. But, a more fun way to do it than some of the alternatives.

  10. First Gen American Says:

    We have a fund that mortgage payments go into but everything else comes out of slush. If anything is leftover, it goes into house repairs.

    I have often thought hat once our mortgage is paid, (Countdown has commenced), we could do a separate account for big annual expenses like taxes, insurance, etc.

    I do have a next car fund in a cd. (Basically the proceeds from when I sold my last car.). It only has $10k in it so its more of a used car fund but at least it’s there.

    We have a big e-fund in savings bonds too.

    Lastly I’ll note that having all this cash around and available seemed like an impossible goal in my early 20s but it is achievable over time.

    I tend to also need to hide money from myself, hence things like savings bonds, otherwise it is likely to get used up.

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