Tuesday, December 11, 2007

2008 Budgeting

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.


NCN said...

One quick note -
The 2007 contribution limit for Roth IRA is 4K
The 2008 contribution limit for Roth IRA is 5K

Rock on,

Anonymous said...

Another note on the Roth IRA: Remember that there are income limits for contributing to a Roth. My gross income last year was approx $100k same as you, but when I did all the calculations, my AGI was high enough that I had to split my IRA contribution between Roth and a traditional IRA. Your AGI will probably be different than mine (because, for example, I don't own a home and don't get the related mortgage interest deduction), but you should check it out to be sure.

Also, from looking at your draft budgets, it looks like you don't "pay yourself first" as far as saving, but just add to saving whatever is left over after all of you other budget items. You might consider setting a savings goal for the year and having that automatically transferred to a savings account and treating it just like your 401K, like it doesn't exist. Then budget the rest of your expenses with what's left. You'll compel yourself to find areas to cut back if you don't have the cash, just as if your salary was lower.

Anonymous said...

I agree with the anonymous commenter above in terms of paying yourself first. At the beginning of each month, budgeted amounts go to savings accounts and retirement plan and then, I have to make-do with what I have. Sometimes I postpone big ticket purchases, sometimes I try not to eat out so much. This is a tough month because of the holidays so I decided not to participate in an occassion with old school mates this Friday. This year I am planning a big vacation in the US so, I shall cut back on clothing and household expenses which are totally postponable to next year.

SavingDiva said...

If you're looking for an easy way to cut costs, try your food budget. While I used to go out to eat 3 meals a day, it was rough to get away from...However, now I wouldn't do it any other way! Preparing meals at home is super easy and inexpensive.

Anonymous said...

The people that said to "pay yourself first" are correct. Do you have an emergency fund of 6 months of expenses? If you lost your job tomorrow, how long would you be able to keep up with the basics?

If I were in your shoes, I would put $500 a month in a savings account to bolster my savings. It would be a budgeted item and it would be deposited as soon as I received the paycheck.

The economy will lose a lot of jobs in the next 12 months. Even if you feel secure today, that can change quickly.

Total 2008 savings:

IRA $5000
401k $15,500
Savings $6,000

Defer the vacation until you know that your job is secure and you have met all the savings goals for the year. Then start a separate savings fund for that large expenditure.

Anonymous said...

As maybe mentioned, Roth IRA is 5k next year (if you still qualify for it).

RacerX said...

Really interesting to see how subtle differences make a huge difference. Goes to the whole $5 Latte argument...260 working days (then take away holidays etc) you can drop $1000-$1200 pretty easy.

Thanks for the insight!

Madame X said...

Thanks for catching the Roth error, everyone.

To those who mention paying myself first, I see the retirement savings as a big part of doing that. I have a good start on retirement savings for someone my age, and a good enough cushion of other savings to cover being unemployed for six months.or even more if I had to. I do want to save additional money on top of my retirement plans, but I'm ok with it being only a few thousand dollars more a year. For most of this year I had an automatic transfer into a savings account of $225 a month, and I plan to try to get back to that, but I may let that monthly savings budget be less if I get a big enough bonus this spring, since that will instantly go into savings.

freecia said...

How about generating more income via investments? Or even selling some of the items you don't need anymore/donate to get the refund.
If you think you always want to eat out, you might start reading some food blogs like http://noteatingoutinny.com/ to tempt yourself into cooking for yourself and friends. Might be worth it to save on costs that could go to vacation/emergency fund.

Madame X said...

Freecia-- I do have some additional income from investments, but part of my budgeting strategy is not to include any income but salary and bonus-- by "hiding" the rest, it becomes automatic savings!

Anonymous said...

hi. so i'm the non new yorker who wanted to see a breakdown of the food budget. can we now see a break down of the clothes budget? 2000 bucks a year on clothes? for one fairly sensible sounding person? really?

what amount is considered sane by new yorkers?

i'm thinking of that scene in which carrie bradshaw calculates she spent a down payment's worth of money on shoes. but she's carrie bradshaw. you know?

Anonymous said...

If you work in the publishing industry, would your company pay for subscriptions that are legitimately work-related or can you substitute free online versions for print versions? Does your company offer a health club reimbursement benefit (usually taxed as income)? Is there a way to reduce your utility bill? (I might be mistaken, but I thought you didn't have cable. If I didn't have cable/Internet, my annual electric/cell phone [don't need a landline] bill would be about $1100.)

contrary canary said...

I've heard having a sexual relationship can cut down on fod and clothing costs since you're too busy having relations to be preoccupied by conspicuous consumption.

Chief Family Officer said...

I hate these dilemmas. The ultra-conservative part of me says you should cut back on your spending, but the practical part of me says that if you're confident you'll get your bonus, then let it be. I know that if it were me, the practical one would prevail!

Elizabeth said...

madame X,

I've been following your blog and think we must be sisters separated at birth -- you're the city mouse and I'm the suburban mouse ;-)

Here's my take on your budget question: as tempting as it is, don't count your chickens before they've hatched. In other words, don't add your bonus into your budget until you've actually received it.

Taking a page from Jesse's 4 Rules of Cash Flow (www.youneedabudget.com), you should apply this coming year's bonus to the following year's budget. In other words, don't spend your 2008 bonus until 2009.

From a personal experience standpoint, it's so easy and tempting to count on bonuses and overtime when you earn them on a regular basis. But it's a bad habit to get into. At the very least, plan to put half of your bonus into some form of savings or investment account adding the other half to your budget (though I still think that you should hold off on spending -- and budgeting -- those funds until you actually receive them).

You state that you have enough in savings to last at least 6 months and that your IRA and 401k accounts are fully funded. How about investing in some growth funds or something that's a bit riskier than your IRA and 401k but has the potential of earning a little more? Sure, you could spend it or you could put it to work for you. Personally, I'd choose to put a good chunk of it to work.

Anonymous said...

There are guidelines out there about how much percentage-wise it is recommended to spend on each category. Michelle Singletary has one http://www.washingtonpost.com/wp-dyn/content/article/2006/09/09/AR2006090900108.html
It seems to me like you are doing fine, you have a lot of cash and retirement savings, so nothing to beat yourself up about at all. Maybe the guidelines will help if you want to get a sense from an "expert" as to how much you "should" be spending on each category.

Anonymous said...

I've just about given up on line item budgeting.

My plan for 2008 is simple:
1) Give 10%
2) Save 10%
3) Pay essentials: house, utilities, insurances, etc
4) Takes what's left and live on that.

1) On pay day write check to give and electronically transfer savings out.
2) All bills come out automatically on even payment plans.
3) Take the rest out as cash for food, gasoline, clothing, going out to eat. Don't keep up with categories. Spend on whatever we need/want until there is no more money.

Key point: Don't use credit or debit cards that lead to overspending and poor budget management.


HA said...

A Safari Vacation is something which I have been looking to be a part of.
Sad that never can manage to save enough to opt for one.
Went through your post, I have never been good at my finance planning.

I have been trying my luck at http://www.dreamandwin.com , they have been offering various prizes like 7 night Safari Vacation to South Africa, Rich and Famous trip to Maldives etc.
It is worth giving it a shot.

jrf said...

Are you sure you got your taxes right? I admit that I don't live in NYC, but I make more than you, but pay less in taxes... (Did you take out the 401k deduction?)