Capital Allocation

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

I feel like I am entering a new phase financially.  I am looking at aspects of my financial life that I had not contemplated previously.  I have to say that I like it.  As I have stated recently, I am feeling more secure financially than I have ever felt.  What this has meant is that I am beginning to think more in terms of where to save my money and less about can I save money.  Now that the cushion is sufficient, I want my money working as hard for me, as I worked for it.

The Current

The cushion, as I like to call it, is divided between two accounts, my Vanguard brokerage account and my Capital One 360 savings account.  The savings account is where all of our savings go and I use a spreadsheet to keep track of the various things for which we allocate money.  For example, we set aside money for property taxes, gifts, car repairs, and the emergency fund.  The Vanguard account is strictly emergency savings.  

I started the two account approach about 3 years ago as a way to make it harder for me to access the money.  When I first started trying to save for the rainy days, I found it too easy to dip into the savings account.  The lack of discipline is what got us into trouble in the first place.  So, the brokerage was my way of making it harder to access the money.  Instead of simply transferring the money from savings into the checking account, I would first have to sell some securities, wait for the trade to settle, and then transfer the money to the checking account. 

Since the process would take more than a week, it gave me enough time to really think if the transfer was necessary.  I have only tapped the Vanguard once since I opened it, when we bought our house 3 years ago.  In the Vanguard account, we have about $5,600 and in the emergency category in Capital One, there is about $8,200. 

I know what you are thinking, that’s not a big enough reserve. 

I agree.  My goal is to have about $30,000 dedicated to emergency savings.  While I do not have that amount in the emergency bucket, I have other buckets that I could access in the event of an emergency.  For example, I have mentioned that we are saving for a Disney vacation in about 4 years.  Right now, there is about $5,000 in that category.  If I lost my job tomorrow, that $5,000 would become available to use.  So, without going into all the other buckets, there is probably another $13,500 available.

My Plan

I feel like I would like to have the cash portion of the emergency fund at $10,000.  So, I will add some portion of my bonus every year to it until it is at that level.  I figure it should only take a couple of years to get there.  Then I would like to have the Vanguard account make up the rest.  I plan on contributing to it on a regular basis and maybe even more so in the future.  I am sending $75 a month to the account now or $900 a year. 

At a minimum I would like that number to be $1,000 a year.  Depending on what, if any, salary increase I receive next year, it could happen then.  From then on, I would likely throw a little bit of the bonus at it every year as well, just to get to the finish line as quickly as possible.  My strategy is a result of the interest rate I am currently earning.  At 0.75%, any interest I earn is an after-thought.  As I said, I want my money to work as hard as I do.  I have the money invested in 4 different Vanguard ETFs to balance my portfolio.  The hope is never to need this money and maybe I can even use it in retirement.  I’m just glad that after digging out of the hole, I get to admire the grass.

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2 thoughts on “Capital Allocation

  1. Interesting to read about your approach to savings. Personally, I leave everything that will be used to pay bills – long or short term – in my checking account with automatic withdrawal (if possible). I move $100 a month to my emergency fund. I move the rest into my investment account.
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    • I’m probably a little cautious. In theory I could have the emergency fund in all investments. I just want to keep a little on hand for the small emergencies that may be more than my available monthly cash. The investments tend to be more aggressively allocated, 60% domestic stocks, 25% international, 10% real estate and 5% bonds.

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