So, in the first month of unemployment, how did the budget fare?
Net income was $550.32.
Net outgo (including $325 to the self-escrow account for homeowner’s insurance, auto insurance, and property taxes, and $200 to monthly savings) was $1,636. Since that $200 to savings didn’t actually go away, we could say net outgo was really $1,436.
January’s cash flow: –$886
{sigh}
Well, it’s not as dire as it looks. First, I have a $10,000 cushion, so I’m not bouncing any checks yet. Second, I started with $$4,500, the amount accrued by December 31 from my last paycheck and vacation pay. So in terms of dollars that were actually in the account, we have $4500 + 550 – 1436, allowing us to argue with some plausibility that the actual cash flow was a positive $2,514.
The problem with that argument, of course, is that we now have used up almost half the original bankroll, and we still don’t know whether enough cash will come in to cover expenses.
I have yet to see a Social Security check. Because I have no accurate way of knowing what the tax gouge will be, I can only estimate that it will be around $1,000. But in every other case so far, the estimated tax bite of 20% has been a bit on the optimistic side.
And I still have no idea what a full paycheck from the community colleges will look like. January’s munificent net of $161 (!!) was for only two sections, since one started “late”—a week after the first day of classes. And it was, I think, for only one or two days of each section. I had hoped that the fare for three sections would be around $800 to $900. Two of those a month would keep the wolf from the door, and if I actually manage to keep my expenses around $1,400 to $1,600, during the few months when the college is disbursing two full paychecks, it would cover almost all my expenses. The Social Security money, then, could go into savings to cover the high-cost summer months and the six-week winter break.
In the fall, one of my classes is an eight-week session. This means that for half the semester, I will be paid for only two sections; in the other half, I’ll be paid for three sections, with one at an accelerated schedule. Net pay over 16 weeks will be the same, but for half the 16 weeks, I’ll be just barely scraping by.
Clearly, the strategy of cobbling together a living from several piddly sources is not something that can be done without a substantial base to use as a cash cushion. If no major expenses happen, at the end of the year I’ll probably come out about even, maybe as much as a thousand dollars ahead. But it’s going to be close. Very close.
And the car, house, and pool had better keep running without a hitch…
Preparing to write the next installment in a series on achieving financial freedom, I ran some figures to compare the result of paying down a mortgage with extra monthly payments toward principal with investing the same amount monthly in a mutual fund. What I discovered runs against my theory that you’re well served to pay off a mortgage as fast as you can.
I still think that’s true if you’re getting close to retirement. In retirement, every debt should be wiped off your books, because you will need all your cash flow to live on. However, if you’re younger—say, anywhere between 20 and 45—and your mortgage rate is low compared to returns on equity investments, it would be to your advantage to invest extra dollars in a mutual fund earning around 8 percent. At today’s rates, this strategy allow you to accrue enough to pay off the principal faster than will throwing a monthly amount at the loan principal. Here’s how this shakes down:
M’hijito and I have a 30/15 mortgage at 4.3 percent. This means that for the first 15 years, we make payments at the 30-year amortization rate, but after the 15 years have passed, we either have to pay off the loan or we have to refinance it. The loan’s principal is $211,000.
We chose this mortgage because, at the time we bought the house, we believed the real estate market was nearing the bottom. We believed the house would drop in value another $4,000 or $5,000 and then begin to rise, probably at around 3 percent p/a. We figured that in five to ten years we could sell or rent the house and either break even or make a small profit. As everyone now knows, this was dead wrong: in fact, real estate was in free-fall, and the house is now worth at best $170,000, but more realistically around $150,000. This turns the loan into a real albatross. One strategy we are considering is to try to pay down principal with whatever extra monthly payment we can make (which ain’t much!), so that in 15 years, the amount to refinance might at least be no more than the house is actually worth, possibly allowing us to sell the house at that time.
In 15 years, with no extra payment toward principal, the loan balance will be $138,338. Monthly principal and interest payments are $1044; PITI comes to something over $1200.
Note that the projected loan balance is less than the most pessimistic present-day valuation. If the market finally has bottomed out and housing increases in value at 3% a year (a figure that is now being bandied about), in 15 years the house will be worth $233,695. That is less than we paid for it, but at least if we sold the house at that time we would walk away with a little cash in our pockets.
With me out of work, about the most we can afford to pay extra toward loan principal is about $100 a month.
Using Excel’s full value (=FV…) formula, I calculated the the return on a $100/month investment in a mutual fund earning 8% per annum. (Over at Vanguard, a number of stock funds and even a few bond funds are returning at this rate; one of them is Windsor II, in which I happen to already have a little cash.) I then used Quicken to run an amortization schedule, and compared the amount a $100/month investment would be worth in 15 years with the amount an extra $100/month principal payment would reduce the loan balance.
Assuming that our mutual fund investment averaged an 8 percent return, if we sent Vanguard $100 a month, in 15 years we would accrue $34,604 (full value =(.08/12,15*12,-100). If we paid an extra $100 a month toward the loan principal, in 15 years we would have paid the balance down by an extra $18,000 ($100 x 180 pay periods). According to Quicken, we would still owe $113,116.
With no extra payments, remember, we would still owe $138,338.
$138,338 – 113,116 = $25,220
Compare that with the $34,604 we would have earned in the mutual fund. Clearly, we would be ahead—by over $9,000!—by investing the money in a mutual fund with low overhead, such as Vanguard and Fidelity offer.
Well, now. Suppose you were not out of work, and so had plenty of cash to throw at the principal. Let’s suppose you really have plenty of cash and you decide to pay the equivalent of an entire P&I payment toward principal. Then what?
If you put $1,044 into a mutual fund every month, in 15 years you would have $361,264. If you paid $1044/month toward principal (in addition to your regular payment) on a $211,000 loan, you would pay off the loan in 10 years.
But by putting the cash into a mutual fund returning 8 percent, in 10 years you’d earn $190,995. Since in 10 years, with no extra payments, your loan balance would have dropped to $167,901, you’d still come out ahead:
$190,995 – $167,901 = $23,094
In other words, if you put the amount of an extra loan payment in an 8% investment, in ten years you would have enough to pay off the mortgage and still leave $23,000 in your pocket. If you used the same amount to pay toward the loan once a month, you would pay off the debt but would have no cash left over.
The conclusion is obvious: If your goal is to pay off your mortgage, you’re better off investing a regular payment in a decent mutual fund than paying the same amount toward principal.
This assumes your mortgage interest rate is lower than the rate of return from an equity fund. Note also that my figures do not take into consideration the small tax advantage gained by paying mortgage interest; this factor also would tend to improve the picture if you invested in the market.
Risky? Sure. But we now know that investing in real estate is wildly risky, too: more so, it develops, than the stock market. My stock investments are rapidly regaining their pre-crash value, but there’s no credible sign of any recovery in the real estate market here. Even if the value of the house starts to increase at 3% p.a. today, in 15 years it won’t be worth anything like what we paid for it. If property values remain flat for any length of time (as it appears they will), we will lose not only our shirt but our pants, socks, and underwear.
I used to think my father was crazy because he refused to buy a house until after he had saved enough to pay for it in cash. All the time I was growing up, we lived either in company housing or in rentals. His reasoning indeed was crazy—he bought into The Protocols of Zion, an irrational tract that led him to believe all mortgage lenders were part of a hallucinatory international Jewish conspiracy. However, the effect was that when he retired at the age of 53, he had enough cash to buy a house and a car and to support himself and my mother in a middle-class lifestyle without having to work.
Having finally arrived at financial freedom, I’d like to write a series for Funny about Money on how to achieve financial freedom before you drop in the traces. We’ve seen that SDXB managed to escape in early middle age and that he’s never had to go back to a day job. So we know that with luck and smart financial management, it can be done.
If and when reasonably priced universal health care coverage becomes available in this country, quite a few Americans will be in a position to get off the treadmill. Too many of us work in miserable day jobs, pushing paper or waiting on other people who are in equally miserable day jobs, for no other reason than that we must have health insurance and there’s no other way to get it. When we’re freed from that trap, the possibility of running our own daily lives becomes a realistic choice…but only if we can achieve financial freedom: freedom from debt and from the pervasive cultural and psychological influences that herd us toward debt.
To engineer financial freedom, several components of personal finance need to be dealt with and brought under control:
Though none of this is nuclear physics, it’s a process takes several years. Short of inheriting a fortune or winning the lottery, you can’t achieve financial freedom overnight.
To begin with, you need some education or training that will allow you to earn something more than minimum wage. While you don’t need to earn big bucks to find your way to financial freedom, you do need to earn above the bare subsistence level. You need enough income to pay off debt that can’t be avoided (such as student loans and mortgages), to stay out of credit-card debt, and to build savings.
Then you need to find housing that’s affordable, not only in terms of what you earn but within the framework of your goal to escape the rat race. The cost of your roof, whether it’s rent or mortgage payments, has to be low enough to leave something to put into savings.
The same is true of your personal mode of transportation. If you live in one of the few U.S. cities that provides good public transport, you’re in luck. The rest of us have to own a car. We need to find ways to keep the cost of car ownership from consuming funds that could keep us out of debt or be invested in savings.
The foundation of financial freedom is freedom from debt. All debt, including mortgage and car loans. This is tightly linked with another key component of Bumhood, building and investing a fund of cash. Debt and savings have been talked to death on the personal finance blogs, but we’ll review those issues in the coming series.
Finally, there’s the question of how you manage to stay free once you’ve managed to break free. Any number of issues bear on your continued financial freedom, ranging from adult children who need help to the lifestyle you want to (or can) sustain. Since that exploration is about to become the subject of FaM, over the next few months we should make plenty of discoveries along that line.
For quite some time, I’ve been threatening to interview SDXB,* my friend who retired at the age of 47 into a glorious life of what he calls “Bumhood.” He’s not an especially affluent man, nor does he live like a pauper. He chooses to live frugally, and accordingly he chooses to live off the gerbil wheel. Here’s what he has to say for himself.
FaM: What is Bumhood?
SDXB: Bumhood is the state of idleness.
To arrive at Bumhood you must start to plan early in life. It’s not something you can achieve unless you have money in the bank, unless you own your own house, and unless you own your car. And you have no bills: I always pay everything thirty days cash. That is, I pay everything in full every month.
FaM: But you didn’t own your home 20 years ago, when we first got together.
SDXB: I’d just come out of a divorce. As you’ll recall, I was able to buy a house shortly.
Once you take on Bumhood, you realize that it doesn’t take as much money as you thought to stay there, provided that you don’t go into debt.
FaM: Why did you decide to become a Bum?
SDXB: It was during the 1987–88 recession. My public relations business evaporated overnight.
I represented a $9 billion bank and several other financial institutions. They all went belly-up during the collapse of the savings and loan industry. I found myself going to an office and sitting around with nothing to do. My biggest customer kept calling and asking me to do work, but they couldn’t pay.
One fine day a friend and I—he was a securities analyst—went camping in the mountains together. We started a bonfire and drank some whiskey, and somewhere in the drunken fog we decided to wrap up our businesses and become bums.
And we did. It took me three months; he took four. I just handed over all my PR accounts to the guy I was officing with, along with the key.
FaM: Then what happened?
SDXB: Our main concern was whether we could sustain Bumhood over time. Interestingly, over the years my friend and I discovered that, without consulting one another, we arrived at the same plateaus. We discovered that…
Money happens.
Bumhood takes less money than we thought. You don’t need as much as you think you’ll need to live in retirement.
We weren’t alone. There were other people who had become Bums. Because we were Bums, we weren’t limited to loafing and traveling on the weekends. We’d go places during the week, and there were the Bums! These were first-class Bums, mind you, not park-bench bums: people who had gotten themselves set up for Bumhood and were practicing it.
We could travel at will. I went to Europe—Portugal, Spain, France. We went to Hawai’i. I’ve bummed around Alaska, Canada, Mexico, all over the United States.
Meanwhile, I learned how to cook and how to take care of myself. To make Bumhood work, you have to be independent, to be able to take care of yourself as much as possible. You can’t be dependent on restaurants for your food and on dry cleaners for your clothes.
FaM: How does money happen?
SDXB: Money just happens.
For example, after I quit working, I was still close to my profession—journalism and public relations. People would call and ask me to do some writing for them, so I’d make some extra money that way.
And I was in the active Air Force Reserve. I’d get good money from that. I was assigned to Airman, the Air Force’s international magazine. I’d volunteer for assignments that would enable me to travel on the government dime—and get paid for it. I wrote for other magazines, too.
FaM: So it wasn’t really that you weren’t working…
SDXB: No. Money happens because you make money happen. But at all times I had work under control. I ran it. It didn’t run me.
Remember that none of this came about by accident. My earliest thought about preparing for retirement occurred to me in my late 20s. It wasn’t something that just happened to me when I was 47 years old. In addition to planning, there’s a certain amount of luck involved in arriving at Bumhood.
Are you one of those people that money happens to? Probably. Most people can make money on the side. You have to be willing to make money happen: to capitalize on skills and knowledge without signing on full-time.
And you need to make your savings grow.
FaM: How?
SDXB: I placed my money in low-risk securities, and I bought and continue to own stock that’s fairly low-risk. And I bought and traded Swiss francs through two Swiss banks.
FaM: That’s a pretty high-risk enterprise.
SDXB: Yes. It’s an example of where luck worked. I happened to have money in Swiss francs at a time when the dollar was weak and francs were valuable, so I sold them and made a lot of money.
I don’t recommend it. In my ignorance, I lucked out. But I almost took a bath—it was a losing proposition throughout the Carter Administration. Not until Reagan came in and the dollar strengthened was I able to make money.
“Money happening” means making money happen. One reason I wanted to keep my hand in journalism was so I could deduct equipment, some travel expenses, and a portion of my house as office space. The Air Force Reserve could be considered a part-time job, but writing cannot be considered steady work. The Air Force gig wasn’t hard work, and it was good pay because as a chief master sergeant I was a high-ranking noncom. Basically, working for the Air Force meant I got paid to travel.
Everybody has some talent they can use to make money happen, whether it’s handyman work, professional consulting, military reserve work, substitute teaching, selling things on E-bay, yard saling.
FaM: So what were you doing before you became a bum?
SDXB: I served my time in journalism: I was broadcast editor in Utah and Idaho for the Associated Press. For about eight years I was an investigative reporter for the Arizona Repubic, and later for the Phoenix New Times. After that I was editor of Phoenix Business Journal, then a Scripps-Howard newspaper.
My first taste of Bumhood came when I quit PBJ. I told the company I was leaving and gave them four weeks notice. Two weeks later I called and asked if they had a replacement for me. No, they didn’t. With one week to go, they still said no, they didn’t have anyone to take my place. They apparently didn’t believe I was really quitting.
On the day I said I was leaving, they still had no replacement. The next day I left for Europe. I bummed around Europe for two months with a lady friend. She was a hotel executive. We visited England, Ireland, Scotland, France.
When I came back, I did a little freelance writing. So I was sitting in my home office and calculating what would be my maximum income if I worked six days a week as a freelance, when the phone rang. It was one of the largest advertising companies in Arizona. They represented the largest savings and loan in Arizona. Could I handle the PR for First Federal Savings?
I said, “Sure!”
He said, “What’s your rate?”
I had no idea what PR people charged. At this time, I was a pure journalist. “I’ll cost it out,” I said. “I’ll get right back to you.”
I immediately called an old friend who was an old-line Arizona PR guy and asked him the going rate: $90 an hour. Remember, this is in ’88 or ’89—that was a lot of money then.
I said, “My god, Charley! That’s stealing!”
He said, “Don’t ask for any anything less, because if you do you’ll be undercutting everyone else.”
I call the ad guy back and say $90 an hour.
He says, “Can you start tomorrow?”
I learned they’d just fired their vice-president of public relations and needed someone to start immediately. When I hung up I thought, “I don’t know squat about PR!”
So I went down to the main library and checked out books written by top New York City PR people, and that night I started reading. Next day, I met with the bank executives and told them what I could do for them. I was reciting stuff I’d just read. In the ensuing months, I kept coming up with ideas based on what the New York City PR guys wrote. In those days, that kind of stuff was unheard-of in the Arizona market. I kept the bank executives out of trouble and ushered in a name change. In the process, I made a lot of money.
I never knew why they called me or who recommended me. I was probably the top journalist in the community at the time. I’d won the first Don Bolles Investigative Reporting Award, the Virg Hill Award. And I won the Arizona Press Club’s First-Place Investigative Reporting Award four consecutive years.
FaM: How long have you been a Bum?
SDXB: I retired at the age of 47. [SDXB is now 69.] I bummed around in the Air Force part-time. Freelanced for magazines off and on. In 2000, I retired from the Air Force Reserve, providing myself with a nice pension. I continued to freelance off and on for another six years. In 2006 or so, I just quit writing altogether.
FaM: What did you do about health insurance?
SDXB: Well, I was in good health and I took a chance that I’d stay that way. At age 60, I got military health care, and now I have Medicare. But before that, the only time I was covered was when I was on active Air Force duty. Fortunately, I never had any serious health problems.
Luck is part of Bumhood.
FaM: You live pretty well, for a person with no visible means of support.
SDXB: As a Bum, you learn to keep your costs under control by living within your means. Bums always buy vehicles outright, in cash, and we keep them until they’re ready to fall apart. You don’t buy anything on time. And buy your house outright. The monthly payment you might have been making is your return on investment. So if you would have been paying $1,000 or $1,200 a month on a mortgage, paying it off means you have that much virtual income in your pocket. When you own the roof over your head, you’re paying the amount of the mortgage payment to yourself, not to the bank.
One reason I moved to a retirement community is that it’s much cheaper to live here. Sun City has no municipal school taxes, and insurance is lower. After I moved here from mid-town Phoenix, I estimated I saved $1,500 a year on insurance and tax alone.
FaM: I know people have wondered if you didn’t get bored, having quit working at the height of your career.
SDXB: I’m a pretty organized person. I took that organization into retirement. I maintain a daily to-do list that keeps me moving forward.
And I sat down and made a list of everything I could think of that was recreational—there must be a hundred items on it, from shooting pool to going to museums (on bum’s night, of course, when admission is free). I hike every day to get exercise. I ride bicycles. I got into ballroom dancing and ice skating. I entertain friends with gourmet dinners.
There’s a lot to do in Bumhood.
*SDXB: Semi-demi-exboyfriend
This interview led to a series on ways to achieve financial freedom:
Wow, did I get these figures wrong! My take-home salary is far more than what appeared in the original of this post…I don’t know where I came up with a figure of $32,900. I was even sober when I wrote this! Corrected figures appear in boldface next to my original wrong calculations.
Well, it’ll be interesting to see what happens next. In 2010, my gross income will be significantly less than half of what I earn today. Assuming state and federal taxes total no more than 20 percent (a big assumption!), the combined net of Social Security and teaching will be $9,700 ($17,710) less than I net from my salary today. That doesn’t count what I make freelancing, because next year I will not be allowed to earn freelance income. Since Social Security’s rules will limit me from earning a living wage, 2010 will be a year of real penury. It remains to be seen whether I can survive under those circumstances.
By “survive” I mean “stay in my home, eat, keep my dog, and live through a 118-degree summer.”
There are a couple of extenuating circumstances.
I’ll get a chunk of vacation pay that should net out to about $3,965 (assuming GDU doesn’t pull another of its numbers on me, another Big Assumption).
About $1,900 remains in the S-Corporation, after paying for the MacBook. If I can finish the page proofs I’m reading before Christmas, I could in theory push the 2009 drawdown to about $2,200. It probably would be better, though, to delay that job to 2010, so as to leave its payment in the corporate account to cover things like printer ink and computer repairs with nontaxable money. So, let’s say I net about $1,500 from what remains of freelance income.
This will give me a grand total of $28,985 (net, if taxes are not too extortionate) to live on next year. Compare that to my present net of $32,900 ($41,210).
Two strategies may enhance things a bit:
Even though I hope to avoid drawing anything from retirement savings in 2010 (so as to wait and see if investments continue to recover from the crash of the Bush economy), to have the state consider me “retired” so that it will disgorge the $19,000 it owes me for unused vacation time, I will have to draw a few bucks from my 403(b) until such time as the bureaucrat in charge of that program approves me. So the plan now is to draw down $500 a month until we know the sick-leave payment has been approved. That process can take as long as three months, and so I’ll probably have to pull out about $1,500, adding (optimistically speaking) another $1,200 net to the 28 grand.
Now we’re approaching a net of $29,200 ($30,185), which is $3,700 ($11,025) less than I bring home today.
My share of the mortgage on the Luke house will be paid with $10,000 worth of tax-free dividends from an antique whole life policy, giving me a year’s reprieve on having to draw those payments down from savings.
Still…where is that $3,700 ($11,025) shortfall gunna come from?
Well, I put $573 a month into savings right now. That adds up to $6,800 a year. Of that, only $3,900 is nonnegotiable: I have to self-escrow that much to cover the property tax, homeowner’s insurance, and car insurance. So if that’s the only money I set aside, in 2010 I can devote $2,900 to living expenses that I used to put into savings.
So, now I’m only $800 ($8,125) short of the amount I actually spend on living expenses. That, I’m sure, can be managed through frugality and tight budgeting. (Yeah, right! Only if I sell my home and take up residence under the Seventh Avenue Underpass!)
This scenario applies only to 2010. If I have to continue refraining from drawing down savings in 2011, then things will look different. I can earn about $10,000 a year freelancing—in a good year. So the net of teaching three-and-three will come to $11,520 (in the unlikely event that taxes don’t rise much); the net of Social Security is about $12,000. Add net freelance income of around $8,000, and you get $31,250 ($31,520) as the base net income, not counting savings drawdown, in 2011.
On the surface, that’s not too bad—pretty close to what I’m earning now. (Holy Hell, it’s over ten grand less than what I take home now!) But it doesn’t count the cost of Medicare, eleven times what I’m paying for health insurance today; and it doesn’t count the cost of the mortgage, which on its own represents about 1 percent of my total savings. (I am screwed, screwed, ge-screwed!)
And we have to remember that taxes and insurance will not stay the same. On the federal level, sooner than later we’ll have to pay the cost of repairing the damage done by the past decades of ill-advised leadership. Locally, the state is still a phenomenal $1.4 billion short, even after the Draconian budget just passed by the legislature. If the most basic services are to stay in place—firefighting, police protection (forget services to the sick and elderly poor)—then our dim-bulb legislators must face the fact that they will have to raise taxes. Homeowner’s insurance, too, never goes down; and when I reach the point where I’m forced to replace my 10-year-old car with a newer model, taxes and insurance on that will increase, too.
If my investment advisers are right that my savings will return to something resembling their former glory after a year or so, then I should be able to get by on a 4 percent drawdown…as long as I can dodder into a classroom. (Dream on!) That, of course, will not be forever.
But the day after tomorrow will have to take care of itself. (By then I’ll have starved to death, so someone else can figure out what to do with the day after tomorrow.)
I must have figuredmy income on a 24-period basis rather than the actual 26 pay periods created by PeopleSoft’s hideous biweekly pay scheme, since I bank the so-called “extra” paychecks in savings. Even that is wrong, though: the annual total would be $38,040. What hat the $32,900 figure came out of, I can’t imagine!
Well! Only six more days till the end of the current budget cycle, and an amazing $352 is left in the kitty. Not, we might add, through any extreme deprivation: I’ve gone out to eat with friends four times in the past three weeks; bought $38 worth of scrumptious wine at Costco (some of which I enjoyed last night with steak, asparagus, and a mighty tasty avocado salad); spent over $80 on gasoline; and had my hair done. Two women have even asked who does my hair! Since I cut the budget to $1,000 preparatory to canning day, having some $350 left with a less than a week to go is a very positive development, indeed.
How is this happening? Since January, on a $1,200 kitty I’ve run over budget five months out of nine. Of the four months in the black, only one of them came in with expenditures of less than $1,000; a second was close, but no cigar.
One explanation, I think, is stockpiling: at the start of this cycle, the freezer held plenty of food. Yet I’ve spent about $317 at Costco, much (but not all) of it on food. There have been no extraordinary bills (yet): no vet bills, no car repairs, no plum…oh, wait: there was a plumbing bill. Hmmm…
The big change is that I decided to abandon microbudgeting and see what would happen if I set up virtual “envelopes” for the month instead. In microbudgeting, the budgeted amount for the month is divided in four and allocated to four periods of roughly a week each. With the envelope system, you establish an amount to spend on each of several categories, and then quit spending on a given category when you reach its limit.
Presently, the result looks like this:
In this first experiment, it appears I’ve overbudgeted for Costco and underbudgeted for gasoline and hair. Since I don’t get my hair cut every month, I figured I could think of $20 as a kind of “average,” but maybe it would be better simply not to have a “hair” budget in the months when I don’t need a trim. No law says you have to have the same budget categories, month in and month out.
I hardly ever go out to eat—really, it’s a rare month when I spend as much as $50 in restaurants. For some reason, this month all my friends have been asking me to join them, and since I have precious few friends, I incline not to turn them down. At any rate, it’s covered by the savings from the pool and Cost Plus categories.
So the question is: Does a virtual “envelope” system, even when the proprietor cheats here and there, work better than microbudgeting?
Psychologically, it may: with the weekly microbudget, one feels it’s OK to spend all the way to the hilt. In fact, when the overall monthly budget gets tight, it’s difficult not to spend the entire week’s microbudget: $250 is not much to cover all one’s bills, from food and gasoline to pet care and property maintenance. One $200 run on Costco plus a tank of gas and you’re over budget…and how often can you get out of Costco for under $200?
With the envelope system, you don’t feel so constrained: you have all month in which to spend the money allocated for groceries, clothing, gasoline, and the like. One $150 trip to Costco came nowhere near running me into the red, but if I’d spent that much out of a one-week microbudget and then had to spend $35 on gas and $30 on the hairstylist, I’d have had $35 left to last the rest of the week. One trip to Safeway would have blown it. With the virtual envelopes, it’s easy to see what remains in the budget for specific purposes, making it easy to back off some expenditures as needed.
Clearly I’m going to have to reallocate allowances for some of the categories: less on Costco and more on gas, for example. But if I’m right that this approach works better than microbudgeting, the implication is huge.
Huge.
It means that next year I should easily be able to live within my much constrained means, without having to hold a fulltime job and without even having to crank any freelance work. Combined income from Social Security and part-time teaching should more than cover my needs!
$14,400 SS + $14,160 teaching – 20% tax = $22,848 net income
$565 monthly recurring costs + $1,000 discretionary budget x 12 = $18,780 routine expenses
That leaves me almost $4,070 to the good. From what I can tell, that extra amount will just cover the cost of Medicare, which should run around $300 a month, by the time I’ve cobbled together all the aspects that go to creating full coverage. It doesn’t leave anything for emergency savings, but I have $10,000 in that fund to cover 2010; in the following year I’ll be allowed to earn more money.
So, if I don’t get the Glendale Community College job, it won’t much matter: as long as I can keep discretionary spending to around $1,000 a month, I should be fine.
And in the unlikely event that I do get the job, it would make sense to stay on this budget and save all the unspent net income, thereby making it possible not only to buy a car in cash but also to replenish savings with new earnings.
