Monday, December 29, 2008

Madd Money: Charting a More Refined Course in 2009

2008 was a pretty darned good year all told for my family and me. Financial total wise, it was not a banner year, but that is because the entire market retreated heavily in 2008. The housing market is down significantly, and some might say rightly so, but it’s still not pleasant to think that an asset you hold is down in value. No, the reason why 2008 was a banner year in our household was that, for the first time in many years, our total savings rate increased, and it increased significantly.

At this time last year, we paid off our mortgage for our house, with the goal to take that house payment money and save it, not inflate our lifestyle and buy more stuff. Looking back at what the market has done this year, it turned out to be one of the luckiest moves we ever made. We've never for a second assumed this was some skillful financial decision; I just felt anxious about not being able to save money for the future, and thus made the decision to sell off my shares of Cisco and Synaptics (the only single stocks I still owned) to completely and totally get us debt free, everything including the house. From there, I made the decision to invest going forward in broadly diversified mutual funds through my company’s 401K plan, through mine and my wife’s ROTH IRA’s and through our children’s 529 plans.

The biggest win for 2008 was the fact that we fully funded a six month emergency fund and determined an absolute threshold value (more than the threshold means we can take that money and invest; fall below the threshold and all investing outside of funding an employer match for 401K stops until the threshold is reached again). In addition, we also maxed out one ROTH IRA, are close to maxing out a second ROTH IRA (we still have until April 15, 2009 to do so), and contributed an additional 9% of gross income to our 401K plan. Looking back, we managed to average a savings rate of 25% of gross income every pay period. Again, that was boosted significantly by the fact that we were no longer making a house payment.

So in the closing days of 2008, things we determined we did well were:

• making an evolving budget and fine tuning it each month

• living primarily on the “envelope system”, where we used cash to make most payments for expenses during the month

• developing a grocery plan that allowed us to significantly trim our grocery bill (truth be told, we could probably do even better if we got truly aggressive on this front, but we're doing way better than we used to :) )

• keeping and monthly funding an escrow account of our own to allow us to pay for recurring expenses (car repairs, insurance, taxes, etc.)

• utilizing a “blow money” system for each of us to allow for some spending freedom (each of us got about $120 per month that we could use as “no questions asked” money to spend)

• budgeting for Christmas this year and making a hard determination that we were not going to go beyond a certain amount of money

• taking advantage of a Health Savings Account with high deductibles to lower our health insurance premiums considerably (even though we spent more cash of our own each visit, our total costs for the year were less than we spent last year with the premium structure the way it originally was)

• we only had to dip into our emergency fund once the entire year (to fix our oven which had a burner go bad)

• we downsized a lot of things that took up a lot of space and gave us more control over the areas where decided to keep things (hnothing worse than going out to buy something you need, knowing full well you have it somewhere, but no clue where it might be because of too much stuff in the way!)

• refinishing our deck and painting the exterior of the house ourselves, while a lot of work to do, was a huge net savings over hiring a professional to do it. This has also given us some confidence in tackling some additional projects in our house on our own.

All of which led to our being able to bank 25% of our gross pay on average in 2008.

By contrast, there were a few areas where we decided we could do better:

• there were a number of “surprises” that seemed to pop up on a recurring basis (things that, try as we might, we just didn’t see coming, or they suddenly got thrust on us and required that we spend to cover them). Last year, we made a point to write down any “gotcha” that we had to deal with, and this coming year, we plan to continue to do the same, and compare it to last years “gotcha” list. If we see it’s about to happen again, we know it’s something we need to plan for and apply to the regular spending escrow account. We realize we can’t plan for every eventuality, but many months of data help to determine true anomalies and which areas really should be worked into the ongoing budget.

• there is still a lot of “stuff” that we have that is really of questionable utility value, but I’m still leaning on the side of “oh no , I can’t get rid of that”... but each time I approach these areas, I get a little better and a little more realistic. Not to mention, I’d also like to see some monetary return for some of these items should I sell them. My “Shedding of Innocent Stuff” section of this blog was developed to help me do exactly this :).

• in 2009, I want to make our household finances 100% transparent, where all of us (including the kids) have a true understanding where the money goes and why. This way, it’s my hope that the whole family can pitch in and help make the decisions about what we can do and how to manage our home. Now that tools like NetworthIQ and Quicken Online are readily available (and free to use), this should be relatively easy to accomplish (of course, the devil is always in the details, ain’t it :)?).

• In 2009, I want to encourage my children to make some concrete plans regarding their own money that they earn, and how they would like to donate, save and spent it, with a goal of all the kids at the minimum making a commitment to tithe 10% regularly, save 40% and feel free to spend the remaining 50% if they so choose.

So those are my concrete financial goals for next year, which can always be associated with the more amorphous goals of “earn more money” and “save more money” that everyone always makes. It’s my hope that following through on the areas we did well in 2008, as well as using the action plan we have for 2009, we will be able to do both :).

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