This week we’ll talk about some suboptimal moves I’m making with my money and why I’m making them. This week we’ll focus on my discretionary fund.
To start, we should describe what my discretionary fund is. This is the fund where I put leftover money from my discretionary budget every month. This money can then be used to pay for goals, travel, or other things down the road. Basically, a fund of leftover money from a part of my budget I’ve put aside every month that can be spent on anything. I expect this to be about $50-75 a month, my budget is to have no more than $100 in discretionary expenses every month. Barring the costs to fund goals, I easily come in under this number.
Now, what is the suboptimal financial move that I’m making? In short, I keep the funds that I divert to this fund in a regular savings account with a low-interest rate. The most obvious issue, and the one I want to talk about today, is that I’m leaving interest on the table.
Why don’t I put it in a High-Yield account?
So the most obvious solution to this suboptimal move is I could just put it in a high-yield savings account. The first reason I don’t is that my bank doesn’t let you open a high-yield savings account without a minimum initial deposit of $10,000 (and offers essentially the same interest rate as a regular savings account with them if you have less than that in the high-yield account). I could put the funds in my existing high-yield account, but I like having the funds separate so that I can see the amount that is in this fund at a glance.
I could put the funds in a high-yield account elsewhere, I would probably even get a higher interest rate than keeping it with my existing bank regardless of which account I kept it in. The only reason I don’t do this is that I like to have my funds in a centralized location. Adding another bank adds another website and at least one more account to link and keep track of. To me, the amounts I expect to see in this fund are so small that it wouldn’t be worth it to deal with all of that extra work.
One reason I’d be tempted to go this route in the future is if the amount of money in this fund proves to be rather large. Unlike my emergency fund which I want to be able to tap within an extremely short time should the need arise, with my discretionary fund I use it to cover when I go over budget in a category. With this discretionary fund, I can let it take a few days for funds to transfer before I settle everything up at the end of the month. If I find that the amount in this fund ends up being rather large, maybe I’ll make this move.
Simplicity is best
While I track all of my cash, on a large scale, as just total cash. I like breaking up accounts between their uses. I have my emergency fund in one account, my discretionary in another, and the money to cover my usual day-to-day expenses in a third. In some ways, this is the envelope method of budgeting, just without physical envelopes. It lets me see at a glance how much is in each of these funds and how close I am to going over budget or something similar.
It also keeps the number of institutions I have to juggle simpler. I have to keep track of my credit card accounts, bank accounts, and investment accounts. While my bank has a convenient place where I can aggregate these accounts I still have to go to each institution to do things; say to buy new investments or pay off my credit cards, adding another institution on top of this just makes for one more thing I could potentially forget about every month, granted forgetting to put money into my discretionary fund probably wouldn’t be the end of the world and I’ve automated paying all of these bills.
What About Investing?
As always we have to consider if it would be better to just invest these funds. The theory here would be that I add this leftover money into my investment accounts instead and down the road make the larger purchases this fund was meant to make and don’t invest that amount, I guess I’d view it just as a running amount of how much extra money has been invested. We can even consider if I just invested that extra amount.
From a strictly numbers game, this would work better. Over the long term, I would see higher returns on these “savings” compared to if I saved the money in any kind of savings account. Then I’d just pull from the money I would have invested that month. I’d then need to keep a running tally of how much I have in the fund for each month.
Once again, I don’t know if that’s worth it. It’s going to be less than $100 a month. I don’t think that amount is going to juice my returns that much, especially if I’m not contributing that same amount less than a year later.
Now if I don’t track it, like I do when I save some cash on my utilities or groceries in a month, and say I only set money aside when I have a goal rather than tracking the amounts. But the point of this fund is to allow me to have some guilt-free money to spend and to help me save for goals both now and in the future.
What about a hybrid method?
One method that I find particularly appealing is a hybrid method. In this method you would save the money in a separate account (high-yield or not) up until an upper limit once it reaches this amount, you divert all extra cash into investments and ignore the extra amount you would have until you tap these funds.
As an example we’ll go with the following rule, if this fund reaches $2,000 or more we’ll take a look at the estimated costs of any remaining goals I have and see if any of them would require more than that amount. If not, begin diverting funds that would go to this account into my investment accounts until funds are withdrawn from the discretionary account. Once these funds are withdrawn money begins to flow back into the account.
Of course, this amount can be adjusted as needed, maybe I find $2,000 is too low of a number and I bump it up or maybe I find it’s way too high and bump it down. The point of setting aside extra money beyond my goals anyway, is to give me money to spend on other things too. Maybe if I decide to eat out for the first time in almost half a year, I’d tap these funds for that.
Wrapping it up
So in summary, I’m making a suboptimal financial move with a small amount of money mostly because it’s not worth it for anything more complicated when it’s less than $100 a month (and I don’t anticipate the fund ever breaking $10,000). Most of the money is going to be moving out of the account in a few months anyway. I’m not seeking higher returns since it wouldn’t have the long-term benefit from compounding. I do find the idea of a hybrid method to keep the account balance reasonable to be a good idea though.
That’s all I’ve got this week. I’ll see you all next time.