After yesterday's kind of lame, mopey post about how hard I'm finding it to make ends meet on $100,000 a year (cue the microscopic violins), I decided to get back into positive, pro-active, take-charge mode and work on my spending budget for 2008. Here's how I like to tackle it:
1) I start with the assumption that I will max out my 401k via deductions from my paychecks throughout the year. I want to pretend that $15,500 never existed. I also plan to max out my Roth IRA to $4,000 if possible, [OOPS! The max for 2008 is actually $5,000, as pointed out by some commenters.] and though I have always made that contribution in a lump sum rather than regular deductions, I'm also going to pretend that money never existed.
2) I estimate the taxes I'll have to pay for the year, taking into account a small refund. I try to overestimate this, as it's a huge amount of money and I don't want to count on my net pay being any more than it really will be.
3) Then I start plugging in some of my major expenses. I'm doing this in Excel for the moment, just to play with the numbers before I finalize them in more detail in Quicken. The major lines are:
- Housing: I am estimating this at my current cost even though I hope it will be lower once my condo's tax abatement is resolved.
- Food: I'm trying to be realistic about my habits here and budget a little more per month than I allowed myself this past year. I like going out now and then, so I'm going to plan on doing that, rather than setting this budget too tight and setting myself up for failure.
- Travel: I really want to take a fun vacation this year and have been discussing some fabulous potential destinations with a friend who I may travel with. She wants to consider a safari in Africa-- that is probably too expensive for me to do this year, but there are some other options that could also be pretty fantastic, including destinations in South America and Europe. I'm starting off with a big number in this line of the budget, just to see how it works out.
The rest of my budget lines are pretty standard items, where I'll put in amounts that are slightly inflated from what they were this year. For Household, I'm giving myself a little extra for some more new home expenses, but I plan to restrain myself from anything major there. For Subscriptions, I cut back a little as I'm letting a couple of magazines go without renewal.
4) For all my budget lines, I've noted how flexible they are, giving two stars to lines where I could really cut back if I wanted to, and one star to lines where I could make some minor tweaks. Lines without any stars are things that are pretty much fixed, non-negotiable expenses.
5) After entering all these things as yearly totals, I add a calculation for monthly averages. I also split the budget out in two ways: first, counting all expenses including taxes vs. my total gross pay including salary and bonus, and second, comparing my net paycheck to expenses that will be paid out of that money, i.e. taking bonus, taxes and retirement savings out of the picture.
Here's how it turns out so far:
It's not looking all that great. In the overall yearly picture, it's good that I'll put $20,000 towards retirement and other savings, but that depends on my getting a decent bonus. On the net pay side, I'm not doing so well. I'd be in the red without my bonus to make up the shortfall. Since my bonus is not guaranteed, I like the idea of living within my means as defined by my net pay after maxing out my 401k and assorted other deductions. So should I really aim to cut all my expenses back by about $2,000 for the year?
I could cut back on food, vacation, and clothing and easily close that gap. Here's what happens if I cut just those three categories back to amounts that are in line with what I have actually spent in previous years:
Is the lower budget the way to go? Maybe... On the other hand, I am quite confident I'll get at least some bonus next year, probably more than $2,000, and putting part of it towards my little luxuries like food, vacation and clothing wouldn't be unreasonable. So over the next month or so, I'll be playing with these numbers more, tweaking them further in Quicken, and trying to get to something I feel comfortable with in terms of balancing fun and frugality.
I think it is a good exercise to play around with budgets in terms of high and low extremes. Look at the "what if" scenario of spending lots of money on things you want, as well as the opposite scenario of cutting back expenses, saying no to certain things, and maximizing your savings for the future. Neither extreme is likely to be realistic, but hopefully the exercise will help you find the right point of balance in between.