Save for Big Ticket Items only Once

Too recently my husband shared a tip he heard from a You Tuber on how to save for used cars for 3 years in an investment account at 8 % annual return and you would never save for car again. Your original fund would keep growing and you would only use part of it for your car purchase. I thought it was a brilliant idea. I told him that I was impressed how the You Tuber applied my long term goal to his short term goal. He makes it look doable. I reminded my husband that was the same end goal but different approach to what I described in my article “How to Build a Net Worth of more than $1 Million within 15 years”. You save and invest for a number of years and the annual dividend and returns cover your living expenses without you touching your capital. My husband’s idea is breaking down the long term goal into smaller and short term goals. I thought it was a smart thing to do and it gives you the excitement to continue and eventually all the small goals would lead to the long term goal. He suggested we try the You Tuber’s approach on car and home appliances. I liked his idea. I told him that we could do that but my approach will be different. I prefer to apply my long term goal approach to short term goals. I am a number type person and I like to have a formula behind my ideas that I can change the variables and reach the results I want. I think my husband has a great idea and decided to share it with our community. If you don’t own a house, you could apply the formula and the approach to other financial goals in your life. For us my husband wants us to save for all the home appliances, car, and invest the money in a way that the return would just pay for the appliances / car and our capital would remain invested. He also suggested we group some appliances together and each item or each group would have its own stocks. I told him what information we need to gather before we sit down and make plans.

The Formula:

Figure it out how much should you invest at 4% a year to generate the amount you need by the time you need it so that you just collect the dividend to spend without touching your capital. You would never pay for that particular item out of your pocket again.

Information to Gather:

Look for strong stocks that pays an annual dividend of 4% or more.

Figure out the cost or how much you need to spent on a particular item.

Figure it out how often you need that amount or how often you need to replace the item, or the average life expectancy of the item.

Figure it out how much to invest in total. At 4% return, that is the cost of the item times 25 divide by the life expectancy.

Capital = Item Cost * 25 / Item’s Life Expectancy or

Capital = Item Cost * (1/ Annual Dividend Yield or Return %) / Item’s Life Expectancy

Now that you know the capital to invest for that item, you decide on time frame and amount. For how long you need to save and how much you need to save a month to meet your goal.

I am visual type so let’s use an example. There are scientific calculators online that are more accurate. But you can do it simply too. You would generate more returns to cover the inflation that way.

Example: We replaced our furnace in 2015. We moved to the house in September 2014. The previous owner has one year warranty on appliances. The furnace started to make weird noise within that time frame. We called the insurance company. They sent us someone who reported that the furnace was ok. He didn’t hear any noise. After the warranty expired, the noise continued. I asked my husband to call another heating company to check it. Upon inspection, the new company said that we need to replace the furnace. The new guy knew what was wrong. But the cost of replacement was close to the cost of a brand new one. The furnace itself came with a warranty. The professional checked it and called the furnace company. The manufacturer warranty expired one month prior. The furnace was less than 10 years old. It was a nightmare. As first time home buyers, we didn’t expect to replace these big ticket items in the house so early. We have a stove that the home owner’s warranty sent their guy to check multiple times without fixing the problem. We know the stove was old and we would need to replace it at one point. But very early two burners wouldn’t work. I only cooked with two burners. That was before the furnace issue. If you are a hunting for a house, don’t put your trust on these warranty sellers purchase on appliances. Have some cash on hand just in case you have to foot the bill. We replaced the furnace. The cost of a new furnace and labor cost us about $2,500.

Assuming we want to insure the new furnace ourselves where it pays for itself in the future. Let’s see how much premium we need to pay.

Cost: $2,500

Year: 15 years. It lasts 15 years according to the Consumer Reports

How much do we need to invest at 4% return so that in 15 years we could replace the furnace using the dividend?

Original Capital: $62,500 ($2,500*25) Don’t panic. That is if you need $2,500 a year. We need $2,500 every 15 years. Therefore $2,500 / 15 =$166.67 / year.

If your investment generates $166.67 a year, in 15 years that would be $2,500. But wait! You would reinvest the dividend and they are paid every quarter. By the power of compounding interest, You would earn more than $2,500 after 15 years and enough to cover the inflation because the cost of replacement would go up. In addition the value of the stock would go up giving you more return at the end. Now we know we need to generate $166.67 a year. How much premium / capital do we need to invest? That is $4,166.75 ($166.67*25) or ( $166.67*100/4)

Original Capital: $4,166.75 (166.67*25) or ($2,500*25/15) or ($166.67*100/4) or ($2,500*(1/4%) / 15)

Capital = Item Cost * (1/ Annual Dividend Yield or Return %) / Item’s Life Expectancy

Capital = $2,500*(1/4%) / 15 = $4,166.75

We need to save and invest $4,166.75 in total prior to our 15 years countdown.

Now let’s determine “Time and How Much”

Time: In one year time frame, “How Much” would be $347.23/month (4,166.75/12). You don’t have to be perfect. It is better to do something than nothing. $347.23 a month is $11.57 a day. If you spend more than $10 a day at work, may be it is time to pack your own lunch and drink and put that amount in your saving until you are ready to invest it in the stock you choose.

I have a spreadsheet where I calculated how much of your own money to save at 4% for these big ticket items to be auto financed or self-insured. The cost of the items can be updated as well as the rate of return and the spreadsheet would calculate the new capital for you.

Spreadsheet on how to save for big ticket items once

Since the furnace, we included in our saving a budget of $1,000 a year for home maintenance. But we have been replacing things around the house that I don’t feel like $1,000 a year in saving for the house is enough. This year our garage door stopped working. My husband went to work late that day. He couldn’t get the car out of the garage in the middle of winter. The garage company came the day after to lift the door and we put the car outside and shut the door back. They told us to replace the door instead of trying to repair it. We will get it down before winter 2019. In spring 2019, the kids broke one window. We taped it with a tape for now. We saved enough for the garage door and started to compare quotes before we make a decision. But we have not started the process for the widow. We have replaced the stove in 2018. The same year we replaced the dryer. These are items that are important and I feel like $1,000 for home maintenance may not be enough. I told my husband few times already that we need to sit down and re-discuss our saving budget. We estimated these irregular expenses could cost $4,000 a year including home maintenance of $1,000. And every month we save $350. I discussed how we budget for our irregular expenses in a previous post. So when my husband talked to me about his idea of saving and investing for home appliances and car in a way that they pay for themselves in the future, I liked the idea. The $1,000 for home maintenance could be for repairs like plumber unclogging our sinks or such. But to replace an appliance, we would just use the dividend of its investments by selling few shares. He even suggested we used different stocks for different appliances. I told him that we might end up with our own mutual funds by the time we invested in different single stocks for these big ticket items. A mutual fund is a group of different stocks.

What do we need to know for this approach of budgeting?

List all the big ticket items to invest for. Group them if necessary especially if they have the same life expectancy or are close the way they operate. I went to the Consumer Report sites and retrieved a list of appliances and how long they last in average.

Search the cost of replacing them.

Use my strategy for every single one.

Calculate how much you need to save a year for every single one.

Calculate how much you need to save a month for every single one.

Total that monthly amount to seed if your income could afford it.

Come up with your own strategy to meet that goal. You could prioritize some and let go some other items. You focus on one item at a time or you might tackle them all.

One good approach would be to save for items that cost less and get them out of your list. You can do it one at a time. Just have a note book to note what stock you purchased for which item. My spreadsheet can be a starting point.

Open a brokerage account with a good brokerage firm. To invest in stocks Charles Schwab is good. TD Ameritrade is good too. I have both but I like Charles Schwab better. It is easier for me to navigate their platform and find what I want. Although Charles Schwab recommend $1,000 to open the account, they don’t inforce it. You can open the account with an initial investment of $100 and go from there.

If you are not comfortable investing in stocks, you could try ETF (Exchange Traded Funds) or mutual funds. ETF trades like stocks. Mutual funds are not flexible like stocks but some can have a very good return higher than 4% annually. By return, I am mean the capital gain, the dividend, the increased in value in their stock portfolio. A no load mutual funds would be recommended if you so choose mutual funds. I have investments in mutual funds. Employee Retirement account is generally invested in mutual funds. T Rowe Price is a good investment company to invest in mutual funds. The minimum you can invest after the initial investment is $100 or more. Charles Schwab is good for mutual funds as well. They have many mutual funds that are free to invest in. Many of them request $100 minimum for initial investment and as little as $1 after that. I have traded ETFs. But I like investing in stocks. There are some companies that allow “direct investment”. The shares you purchased will be registered in your name. These companies hire a transfer agent to handles these processes on their behalf like Computer Share for instance. Investment through that route is safe but not flexible like through a brokerage firm but I like them too for a different purpose.

T Rowe Price: https://www.troweprice.com/corporate/en/home.html

Charles Schwab: https://www.schwab.com/public/schwab/client_home

Example of few Stocks that pay high dividend:

Verizon (VZ): Quarterly dividend of $0.60 and annual dividend of 4.14%

Ford (F): $0.15 paid every quarter or 6.54% of annual dividend

Example of few Mutual funds with High returns: