Thursday, June 07, 2007

Rethinking My Savings Plans

This month's expense recap pointed out one of the confusing things about how I track my savings. I kind of look at it two ways:
One is the overall bottom line. Total income minus total expenses, equaling a net of $36 saved for May. "Expenses" are defined as money I spent that no longer belongs to me in the form of cash or investments. Since my 401k contribution still belongs to me, it's not an expense.

But my second way of looking at it is more useful to me in some ways. I have a spreadsheet where I take my gross spending and expenses and then break out things that sort of "don't count"-- I subtract taxes and business expenses that will be reimbursed, and back out the 401k. What I really want to look at is how much cash I deposited in my savings account, and how much my controllable expenses are. To me, this is a good reality check. I can't spend my retirement savings or home equity or unrealized stock market gains, so I like to pretend they're not there. I see my 401k contributions as a baseline of necessary savings-- but on top of that, I set myself a goal of saving additional money from what is left of my net paycheck.
I set up a spreadsheet that allows me to enter a few numbers from a monthly Quicken summary and look at the results. Here's this year's spreadsheet so far (click image to enlarge):

This allows me to see what I "really" spent each month. I also break out major items like housing, food, and fixed costs like my base monthly cost for cell phone, newspaper subscription, and internet access, so I can see what I spent on "other," which is what I really need to be vigilant about. I note any unusual large expenses that might skew a particular month, and calculate running totals and averages at the bottom. It's kind of a quirky way of doing it, I guess, and I could probably simplify the spreadsheet, but it tells me what I need to know. I highly recommend the exercise!

As you can see, when looking at my cash flow in this way, I'm not exactly behaving like Miss Thrifty! In my grid for 2006, my average monthly total savings in column N was about $1,700 when I backed out extraordinary items like my bonus and condo downpayment. This year the average is $1,229, which is entirely due to 401k savings. Also, I didn't back out my bonus this year, so it skews higher than it should. When you look at the "paycheck cash saved" column, I'm at -$477, vs. $476 in 2006. (Kind of weird how the numbers are almost a mirror image!)

As I always try to remember, it's expensive to move into a new home. For me, it's been particularly so because of the way I had lived for most of my adult life. After living either with someone else who already owned a lot of furniture, or in tiny studios of my own, I made it to my late 30s having bought very little furniture, so now I am catching up! And in general, I am in super-nesting mode in my new place. I just love it, and of course I want it to look nice and be comfortable and well-organized. Which is all very well and good, but at a certain point, I have to acknowledge that I can no longer afford it.
Trying to have a perfect home all at once was what got my mother into over $50,000 worth of credit card debt within a single year. I am definitely her daughter in many respects! Luckily, I have a more stable income than she did, and I am more financially secure and independent in other ways. So is it ok for me to spend this money, or not? What is the right balance point for me? Since I've covered most of the major items on my wish list, I think it's time to put the brakes on for a while. I can't let myself get into the habit of buying everything I want and throwing frugality to the wind. I have to remember that I have much larger fixed housing costs now, so I have to be more careful about what I spend on other things.
In the near future, I'll be looking more at how I'm doing vs. my overall budget and where I'm at in relation to long term retirement savings goals. Now that the dust is starting to settle after moving into my new home, it's time to refocus and make sure I am on track!


Boston Gal said...

I was a bit luckier than you when I moved into my home, I had furniture and "stuff", it was just old and mismatched. I am SLOWLY replacing and acquiring new things. However, even after three years in this house, I still have empty corners and spaces to fill.

You are right; moving into a new home can be expensive. The furniture issue can crop up as a renter or owner - when you move from one space into another you find things don't fit, or the new space inspires some changes. In a way you are lucky that you started with little. It may not feel that way since you had to make a number of large purchases all at once, but believe me, it feels a lot worse when you have to get rid of something perfectly good and spend money on new just because it doesn’t fit into or in the new space.

As a new homeowner you have the challenge of recovering from a very costly transaction (down payment, closing costs, moving expenses) and the desire to spend money on the space to make it “home”. I have made peace with my desire to nest in the house. It will be a drawn-out evolving process and I am just living with the unfinished and not-pulled-together look. Eventually I will get there. This may be gentler on my wallet, but I am not getting the more immediate satisfaction you are seeing.

I am sure you will not repeat your Mother’s mistake, but taking a breather from spending is a good thing. I know I have mentioned it before, but I have found it to be true. It takes two years to really recover from purchasing a home. It is not just the time it seems to take to rebuild savings, but it is also the adjustment period for the new financial reality. It is one thing to know you will be spending more money, it is another thing to be confronted with an empty checking account at the end of the month or to watch your savings balance go down when you are used to watching it only rise.

It takes some time, but your monthly spending habits will adjust and the savings will begin again.

tropicsaver said...

I must say I faced many of the challenges you faced almost two years ago when moving into my first place. I had virtually no furniture and had to start from scratch. I found that after a while I just had to make a concious effort and say that is enough and I am not buying any more. I then stopped going into stores. I still don't have everything I want but I have found I can improvise with a lot of things and others I still don't need.

I can agree with Boston Gals' comment where it takes about two years to recover from a purchase. I am seeing that in my financial life also.

Anonymous said...

I will soon be in the same situation. I have just make an offer on a flat and it has been accepted. Next month deposit etc will go out of my account and I will need to buy a lot of furniture, when I left my ex, I sold my part of the house including all the furniture due to me moving to another country and it was no use to take it with me.

It scares me to think that it will take 2 years to get used to the higher monthly costs. I will just have to hope and pray that I get that salary increase in October and work hard and get some more of those.

Good Luck with the spending break.

Kansas Simplicity said...

Savings Rate Calculation -

Interesting discussion. Some thoughts and perspective back.

Gross versus discretionary income - I think the answer is look at both. When I view my expenses, I take a look at my savings against total gross earning for the month. This gives a sense of how I am doing overall during the year against my plan of savings, wealth building and savings. Second, I take a look at discretionary incomes (gross less taxes, insurance, housing costs and must pays) to determine how I am doing on an basis of things wanted/needed yet not required. Then I compare the trends over time to see how I am doing.

I think this technique gives you two views as your mandatory costs if you treat yourself like a business are must pays yet it helps to see where the money is going post these events.

So, each month end I take my gross salary and calculate the percent saved (deposits/match in 401K, ESPP, Savings account change to account of inflows excluding change in value driven by market forces)with all bills paid in full to determine the gross savings. For my goal of 50% of gross this year it makes the calculation simple and repeatable and does reveal if I had put cash in the account.

Post this event, I use quicken to examine all my costs yet realize I have some must pay or 'fixed' cost likes taxes, housing and medical so I look at the discretionary percent too.

Kansas Simplicity said...

Is it OK to Spend the Money on making a home comfortable yet not lavish or perfect...I live like a spartan so I have to be careful in the home advice area as not my area of expertise..LOL

Look at the facts yet here is what I see as a behavior focus from your blog

1 - A person who saves first via 401K
2 - A person who is not crazy consumerism focused
3 - A person who looks at their expenses even to the penny (banana)
4 - A person who just bought a condo yet is making a home
5 - A person who is self reflective and centered and intelligent

Putting all that together as you examine your purchases with your new home, I think it is fine you are spending some money to live comfortable as this is the reward of your previous years efforts as you make a home.

Yet, if I had to guess where these thoughts manifest themselves, I would say perhaps a latent fear you may spend like your family or repeat the experience of childhood that you do not want to replicate in your household when it comes to money, savings and priorities for retirement. When I see behavior in myself I did not like about my family, I do not want it in my life and in some ways it jolts me yet I realize my situation is so much different too as I have conquered with ever lasting vigilance some of the challenges inherited/learned/impressed from family.

Simplicity in Kansas