Delayed Expense Investing

Budget is life

As I’ve grown older and somewhat wiser in life, I’ve gotten to the point of wanting to be better at one hallmark of respectable adulting: financial management. While far from being an expert at it, I do track my regular fixed expenses (gym, rent, car insurance, etc…), contribute to my 401(k) plan and do a little investing with Wealthfront – one of the robo-advisors currently available to the un-wealthy among us.

When you get increasingly financially competent, you come to realize that exclusively stockpiling cash in traditional savings accounts with paltry interest rates (less than 1% annually is laughable) with inflation roaring its head is not the wisest of moves to make with your money if you’d like to grow what you’ve already got. Having gotten into this rhythm of budgeting, saving some cash while also making automatic, recurring investments via Wealthfront, I came up with an idea I hadn’t heard of before that seemed simple enough to attempt.

Built into my budget are itemized monthly allocations for things I pay for on a less-than-monthly schedule; my semi-annual car insurance premium payment and quarterly membership fees are examples of these allocations. Seeing my budget visualized sparked an idea. What if instead of holding onto these less frequent allocations in my traditional, safe but stagnant savings account, I put them in an investment account where it could ideally grow? Then at some point – two or more months down the line – when that bill becomes due, I withdraw the original capital as needed to cover it.

No brainer, simple investing?

Let’s take car insurance premiums for example. With my current insurance provider, I can purchase a policy at a cheaper cost if I pay upfront for 6 months of coverage. Let’s say that this coverage costs $600. In anticipation of renewing said coverage, I’ll spread its cost out over the following 6 months depositing $100 monthly into a savings or checking account. To renew my coverage, I’ll have the $600 in cash ready to hand over – no problem. Over that 6 month period, however, if that cash were responsibly invested it could’ve (ideally) generated some value depending on market movements and any applicable fees and taxes. This is where I think an interesting opportunity lies.

Before going further, it’s worth noting that all investment options carry a definite risk of unpredictably losing all value. With this approach I make a few but generous assumptions:

  • there is no extreme market downturn,
  • in the event of a downturn, there is access to cash to fund any bills due or that the market will recover prior to that time
  • the cost of investing and managing your portfolio is negligible or better yet, free
  • you only ever withdraw your capital (not its gains) from your investment account and incur no taxes

With these assumptions in place, I believe it could be worth the shot to face the risks involved. To me it seems as though one could be leaving money on the table by keeping this cash in the bank as it ever so slowly devalues thanks to inflation. Again, I’m not looking at this as a get-rich-quick scheme. Instead, I see it as a means of realizing small gains against inflation and hopefully also better than the standard bank account’s interest rates. As you can see below, I’ve been giving this approach a try to some positive results thus far:

Three month old Wealthfront account showing respectable gains.
Three month old Wealthfront account showing respectable gains. (Actual values have been removed/distorted.)

The graph shows the three month progress of my “Delayed Expense Investment” approach – I need a better name for this idea. Notice the green line (account value) hovering above the straight blue line (amount invested). This means that my account value is exceeding the amount I’ve invested. The great warning in this industry worth noting, however, is that past performance is not indicative of future results. In this particular case I am not charged an account management fee as the value of this account is within Wealthfront’s free tier (under $10,000). I have yet to withdraw money from the account. Withdrawals are without cost and free of any frequency limit – as far as I’m aware anyway. It’s important to note that Wealthfront automatically balances your portfolio for you by diversifying your capital among varying asset types according to your configured Risk Score – a setting that determines whether your account has heavier positions in more volatile or stable assets. In other words, my investment is not directly dumped into any single stock, or particular asset class that may be extremely volatile but diversified among a few that will hopefully produce desirable results.

Investment account asset composition.
Investment account asset composition. (*Actual asset values removed.)

The overarching idea for this approach to budget investing assumes that with positive market movement I will always have my original capital (the budgeted, expense amount invested) and any gains made on that capital would remain in the account and continue to grow. If there are no losses, no fees for either account management or transactions made and no taxes incurred then this could prove to be a worthwhile incentive to budget for and invest allocated funds for longer term expenses; a play that hopefully betters taking the safe route of keeping your cash in a traditional checking/savings account.

Is this even practical?

Overall, I’m fascinated that I’ve never come across this quirky sort of way to approach budgeting in my leisurely financial readings and would love to hear others’ thoughts on it. In early reviews of this idea with friends more knowledgeable in finance than I am, the primary concerns surrounded a market downturn, transaction fees eating into account values, capital gains taxes and (wrongfully) encouraging that people live paycheck-to-paycheck in order to invest. If one is accepting of the risks involved and has the privilege of being able part with some (not all) of their money in this way it could be worth the effort. To be clear, the idea here isn’t to generate gains for say, a passive income, but you could ultimately grow small market returns overtime and conquer inflation compared to minuscule (if any) growth in a traditional bank account. Are there any real drawbacks to this that you believe I haven’t considered? Feel free to leave me some (sensible) words this in the comments. I’d appreciate the feedback.

Disclaimer: I’m in no way a qualified financial expert and you should not consider any of the above as a directive for your own accounts. I’m a novice merely willing to experiment, accepting the risk of this experimentation and learning as I go. The aforementioned practice should definitely not be attempted without accepting the risks involved as it is possible to realize a total loss in the value of assets invested in.

One thought on “Delayed Expense Investing”

  1. So I’ve tried a similar program called acorns which is in fact very close in terms of fee to withdraw but has a monthly fee of 1$. I think one thing to know is what stocks they are investing your money in, and not to expect a quick turnaround​ of cash. It’s more of a “savings account” that nets you better interest on your monies and gets you dividends, which is very nice(it’s like saying here is some money for giving us money lol). But the most important thing I think is to stick with it and it should pay off in the long run.

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