Save Up for Big Expenses Ahead of Time. It Forces You to Prioritize Your Goals.

This last March, I took my family on a trip to Europe (London and Paris), a trip that I’d first envisioned in January 2020. Enter pandemic, recovery from pandemic, negotiation of elementary- and middle-school schedules, my own hangups, and I finally did it, four years later.

Before you ask, Thank you, yes, it was wonderful. A truly special time that I hope and believe my girls will remember for a long time. (Also indicative of the trip’s success, my husband’s extremely subtle comment near the end of our week in Paris: “You know, if you wanted to arrange to work remotely from Paris for 6 months or a year, I wouldn’t mind.”)

This is a story of how that trip surprisingly rearranged how I think about managing my own money. The change hasn’t been so much about “making sure I don’t overspend” (not historically a problem for me). It’s been about “making sure I’m actively spending on the right things” (more of a problem).

How I’ve Heretofore Managed My Big-Ticket Spending

(Yes, “heretofore.” ‘Cause, dude, such a good word.)

I’m accustomed to paying for travel out of cash flow: Put plane tickets on my credit card and pay that bill off entirely out of the month’s income. Put lodging on the credit card a month later, and then pay that off entirely. Eventually it’s vacation time and all that’s left is rental car, food, and incidentals. An extra $1000 or $2000 in monthly expenses for a few months didn’t strain things too much; we had enough cushion in our checking account.

Gearing up for our European trip, I knew we wanted to spend more than twice as much money than I ever had on travel. I knew my usual method of paying for it wouldn’t work. The costs were just too high to cover with regular monthly income.

This meant I had to start saving for it in advance. For this particular trip, I started a year, maybe more, in advance.

What did this look like, in practice?

1. I created a rough budget (following Ramit Sethi’s advice about planning for travel) and so knew, more or less, how much money I needed in total.
2. I chose an account to save to.
   1. I have a Vanguard account, invested in a money market fund (5% interest, booyah!), that serves as our emergency fund.
   2. To minimize “startup hassle” in saving for this trip, I just started saving to that same account.
   3. I don’t think this is best practice. I think it’s best to have one goal per account. I don’t do it this way anymore. This here cobbler’s children are finally wearing shoes!
3. I saved to it.
   1. I set up direct deposit from my salary paycheck to this account, which meant I was saving steadily twice a month. 
   2. Every time I had a quarterly distribution from my business, I moved it into this account. For you all out there in Public Tech Company Land, your equivalent would be your quarterly RSU vests.
   3. Every time I had some cash left over at the end of the month in my checking account, I moved it into this account.
4. I saved up the entire expected cost of the trip before I started spending money.

What was the result of all my exquisite financial virtue?

How I Learned to Stop Worrying and Love Spending on What Really Matters to Me

I felt so free to enjoy this trip.

I felt free to spend money on the trip during the planning stage. “Yes, I would like to upgrade my Eurostar seats, thank you! Yes, I would like to make a reservation for afternoon tea at the Lanesborough [side note: thanks for the rec, clients who know who you are!] in London.”

I felt free to spend money while we were traveling. “Darling, you want to try that new dish that looks interesting but also probably we’ll throw most of it away? Go ahead and try it! And get the Orangina while you’re at it!” 

Seriously, it was a revelation.

(It might be helpful to know that I hail from frugal stock. Anyone else raised on stories of using cardboard boxes for every piece of furniture while they were in grad school? Or who slept on a mattress on the floor because you don’t actually need a bed frame? I had built habits of not spending extravagantly on anything, and helpfully married a husband of similar disposition. So, feeling free to spend! just spend! was…is truly novel.)

You’d think, being 47—and having been in the financial planning profession for 14 years—at that time, that I wouldn’t have much more to learn about how to manage my money, at least, not anything Big and Fundamental.

Annnnnd, you’d be wrong.

I was so impressed  by how much joy I got out of this trip exactly because I never had to worry about paying for it, that I came home and immediately opened up an account at Ally Bank. 

Why Ally? Because they have “buckets,” which allow you to have one account, from a legal perspective, which simplifies paperwork, but you can manage the cash in it for as many discrete goals (“buckets”) as you want. (NB: I have no affiliation with Ally Bank.)

I have several trips that I want to save for, and there will probably arise more bigger-ticket house projects that we’ll want to do. I love being able to see how close we’re getting to having those goals fully funded.

Where to Save Your Cash

For large sums of money, and in this interest rate environment (i.e., an environment where you actually get meaningful interest), it’s important to save your cash in a high-yield account. Ally isn’t the highest-interest account I could get. It’s 4.something percent. I could get 5% elsewhere. Hell, I already had a Vanguard money market account providing that rate.

But for me, for now, having the bucket functionality is more important than optimizing for interest rate.

There are lots of different places to get high interest rates, from money market funds at custodians like Vanguard, to fintech companies like Wealthfront and Sofi, who provide FDIC-insured high-yield accounts.

Making Sure Your Spending Reflects Your Priorities Requires Trade-Offs

Our income and wealth aren’t infinite, which means we have to limit our spending. At the same time, we always have a bottomless list of Things We’d Like To Spend Money On. How do we reconcile those two things?  

Prioritizing—making trade-offs—is the name of the game in personal finance (unless your name is Bill or Elon or Mackenzie). But saying something is a priority and acting on that priority—by actually saving up for one expense before you save up for another—are very different.

The Usual Way to Spend

Most of us spend money and pay for it later, either via credit card (the OG Buy Now, Pay Later tool) or a BNPL app (Klarna, Affirm, etc.). If you spend that way, then you kinda never have to make trade-offs about spending. You just buy whatever you want…and worry about actually having the money to pay for it later.

For many people (those not raised on stories of cardboard furniture, for example), this Buy Now, Pay Later approach can create a problem: they spend more than their income can cover. But because the act of buying is divorced from the act of paying, it’s not particularly obvious until you find yourself sweating over how to simply pay the bills, even when your income is high.

For me (and many others), this approach has worked well enough. I’ve used credit cards for my entire adult life, and because my spending has “naturally” fit within my income, I have always been able to pay off my credit card in its entirety every month. 

The More Intentional, “Aligned with Priorities” Way to Spend

I could have taken this BNPL approach to paying for this European trip (or any other big-ticket item). I could have put the $8k of airfare on my credit card, and then also the $6k cost of VRBOs, and and and…and then spend months gradually paying it down (and being stressed to the gills by seeing the large credit card balance).

This isn’t good, even aside from the punitive interest rates on credit card balances, because 

using a credit card (or any BNPL tool) in this way obscures my actual (not stated) spending priorities.

Am I spending more on my higher priorities? I only know after the fact, when the money is already gone. In the meantime, I’m spending a bunch on everything!

Inspired by our experience from this European trip, here’s how we’re approaching spending in our family now:

1. For our “regular” expenses, we still use our credit cards (Buy Now, Pay Later). We pay that off every month with our regular income. Our regular expenses are pretty steady and fit within our salary (i.e., the steady part of our income). It works well.
2. For big-ticket goals, we save up first and buy the item only once we have the entire expense saved (Pay Now, Buy Later).

By saving up ahead of time, I am inescapably aware of what my dollars are going to support. For every dollar I spend today, that’s a dollar I can’t put into my Alaska Marine Highway family vacation account. For every dollar I save to my Alaska Marine Highway family vacation account, that’s a dollar I can’t spend on a new roof.

Is that okay with me? Am I acting in accordance with what I’ve said my priorities are?

A related, but separate, bonus: If you are saving up in cash ahead of time, you can’t overspend. Because you’re not spending money you don’t have. So, you get priority-aligned spending without the fear of overspending. Pretty nice.

How Does This Fit Into Saving for Retirement (and Other Non-Negotiables)?

This discussion is useful only after you’ve already established—and ideally automated—savings for “non-negotiables,” like financial independence (retirement)  and, for many parents, your kids’ college. What I’m talking about in this blog post is relevant to the money that’s available to save/spend after you have an ongoing saving schedule for those non-negotiable goals.

Of course, if reaching financial independence ASAP is your highest priority, well, then, there you go, these other savings accounts should get zero dollars. I don’t particularly recommend this prioritization, but you do you, as they derisively say.

Ultimately, it just comes back to goals. They’re all your goals, and you need to save in a way that honors how you prioritize them. 

Financial Independence is a goal (in fact, it’s about the only goal that we all have), and you should have dedicated accounts for that goal, too. I just find that most people already have some sense of how to save for FI/retirement and they’re already doing it: you max out your 401(k) and maybe a backdoor Roth IRA, and maybe put some money in a taxable account beyond that. Maybe it’s not optimized or not enough, but it’s something meaningful.

It’s the shorter-term or “negotiable” goals (Big wedding! Remodel! Big travel! Fancy car!) that most of us don’t have a sense of how to plan for. And that’s the kind of spending that I’m talking about in this blog post. 

If You’re Already Living Off Your Portfolio (Financially Independent)

It’s probably obvious how this framework applies to you if you’re working a jobbity-job, receiving a paycheck, and living off of said paycheck.

But does it apply if you’re living off your investments? Yes, it can.

I’ve written before about how flexible you need to be if you’re financially independent, living off of your portfolio, and in your 30s and 40s (not that you can become rigid in your finances once you hit 50 or 60). And how you can reasonably withdraw more than a “sustainable” amount of your investment portfolio for a while…because you have the ability to go back to work. (In this latter case, then this blog post isn’t as applicable, because you can “buy” like mad now…and “pay” later in the form of going back to work.)

Let’s say that you’re trying to live off of your portfolio sustainably, because your highest priority is never needing to return to work. You’re withdrawing a conservative percentage of your portfolio every year, say, 2.5%. (If you’re 40 years old, with another 60 years of life to plan for, there really is no agreed-upon sustainable withdrawal rate, as far as I can tell.) Let’s say that gives you $150,000 per year in income (indicating a $6M portfolio).

If you want to try to stay within that 2.5% withdrawal, and you usually spend close to $150k each year, but you have a remodel you want to do for, say, $80k, you have two choices:

1. Withdraw 3.8% instead of 2.5% (3.8% of $6M = $230k = the usual $150k + extra $80k)
2. Continuing withdrawing 2.5%, reduce your spending some, and stockpile the unspent money in a dedicated savings account for the remodel.

Now, if you’re worth $6M and you’re 40, it might seem silly to do #2, especially for a goal that’s meaningful to you and could bring you joy or meaning for the rest of your long time here on earth. And I’d probably agree with you. But again, we come back to priorities: Is it more important to you to maximize your chances of never running out of money and never having to work again? Or is it more important to you to spend more to enjoy life more in the meantime?

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You know the saying, “If I wanted to know your values, I’d look at your calendar and checkbook (or Monarch Money spending reports)”? It’s hard, unending work to make either one of those things reflect the values you espouse (modern life is very distracting!). I hope this approach can help you more easily align at least your checkbook with your values.

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