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Budgeting and strategies for saving

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Some time ago, a financial advisor who was helping me figure out what to do with a small inheritance remarked that I have a special talent for accruing savings by bits and pieces. Well, that does appear to be the case. As we noted the other day, by the end of this year my emergency fund will exceed $24,000—above and beyond the $21,000 squirreled away last year to pay off the Renovation Loan for the downtown house. 

So…how d’you do that?

Truth to tell, I don’t know how others would do it. But here are the basics that work for me:

1. Get out of debt and stay out of debt.

At the outset of my financial journey, I paid off a five-year car loan in 18 months by adding principal prepayments to each regular monthly payment. This freed up the $300/month payments to put into savings. Within a few years, I also paid off the $80,000 mortgage on my house, partly by renting space in my home and using the income to deal with the mortgage.

Debt consumes an enormous amount of your income. Freeing yourself of debt payments effectively “increases” your income even if you never get a raise—you end up with more money to spend or save.

2. Build savings into your budget.

“Pay yourself first” is the operative principle here. This is another way of saying “spend less than you earn.” As I was paying off car and real estate loans, I also set aside a small amount for savings each month. Bare minimum has always been $200 a month. As debts dissolve, some or all of the amount you’ve freed up by paying down debt can be added to the monthly savings.

When you create a budget, an effective way to create savings is to find a place to put every dollar of income. In other words, rather than estimating what you spend on each category (such as food, housing, utilities, transportation) and stopping when those categories are accounted for, build a set categories that will account for your entire net income. One of the categories should be “monthly savings.” This approach is sometimes called “zero-based budgeting.” 

My own approach to budgeting was to carefully track expenditures for a month or two, using Quicken or Excel. This provides a picture of where and how much you’re spending. Expense categories become evident after a month or so of observation. This exercise not only allows you to see where your money is going, it gives you some clues to where you might rein in unruly spending habits (for example, have you run amok at restaurants? did you really need all those clothes?). 

Once I understood my spending patterns, I established reasonable amounts for each category, including a category for savings. Any difference between income and expenditure was added to the “savings” category. Raises in pay resulted in raises in savings; although I might not devote the entire raise to increasing saving (you do have to get a life sometime, after all), I did pay myself better savings on the rare occasions the university gave me an increase.

3. Build side income streams.

Find ways to earn above and beyond the income from your day job. A master’s degree in anything will get you an adjunct teaching job at a community college. Night courses are a lot of fun to teach, because they’re full of adults who are there because they want to be there. Such gigs are not well paid, but every buck counts. I put all my net pay from teaching directly into savings.

You’re not forced to stop with just one side job. If you have a marketable hobby, if you enjoy collecting junk and selling it in yard sales, if you can trade a skill or a product for someone else’s skill, products, or dollars, you can create income that also can build your savings account. In addition to adjunct teaching, I also indulge in freelance editing. Every penny that comes in from that endeavor goes…yep! Right into savings.

Besides helping to build savings, secondary income streams have an enormous potential benefit: you still have them if you’re laid off your day job. Having the experience and contacts in teaching and editing will allow me to ramp up both those enterprises in my coming enforced retirement, and, as we have seen, will support me in the manner to which I intend to remain accustomed even if I never get another full-time job.

4. Take full advantage of your employer’s 401(k) or 403(b) plan.

If your employer  matches contributions to a retirement plan, for heaven’s sake, go for it! Every dollar your employer puts in means twice as much long-term savings for you. 

Allocate these investments intelligently, putting 50 or 60 percent in stocks and 40 or 50 percent in bonds and the money market. You have to assume some risk to make money in your investments; keeping it all in so-called “safe” instruments means your total savings will not keep up with inflation. Though the market does drop every now and again (sometimes with operatic drama!), over time losses and gains level out and and your investments build principal. Put your money in low-load funds to the extent possible (if your employer allows you to invest with Vanguard or Fidelity, these are good choices), because management fees eat into profits at an amazing rate.

Outside of an employment-related plan, go for Roth IRAs. Although these are after-tax instruments, they have the advantage that withdrawals after you reach age 59 1/2 are tax-free, which is huge. Also, they allow you to pass money to your heirs without the nasty tax gouges inherent to 401(k) plans and traditional IRAs. Here, too, set up your IRA with a low-load provider such as Vanguard or Fidelity.

5. Cultivate a frugal lifestyle.

Try to stay sane about this. You don’t really have to live like Our Hero, Scrooge McDuck. But on the other hand, neither do you have to live like an investment banker riding high. Get over the temptation to buy every new gadget just because it’s out there; to accrue stuff because all your friends, relatives and neighbors accrue stuff; to own bigger things and more things than you really need. Learn to distinguish between want and need, and then train yourself to appreciate the nonmaterial riches of life.

Frugality and simple living are the keys to living within your means. Spending less than you earn makes it possible to build savings and, eventually, to achieve financial freedom.

DIY splendor!

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One of Funny’s Ten Money Principles is “do it yourself.” Great piles of cash are to be saved (and spent) by following this principle. If you’re at all handy or crafty, improvements to your house, yard, and vehicles are waiting for you.

This weekend I visited the home of some friends who deserve the nomination for All-Time Great Do-It-Yourselfers. Fred is a firefighter, and Kathy works for the Great Desert University. A few years ago, not long before the real estate bubble began its final expansion, they built their dream house on an acre of land under the White Tank Mountains, a natural preserve on the far west side of the Valley. The basic structure of the house was built by the developer, a man they had met through their daughter’s sport, but Fred wired the place for sound, and working together Fred and Kathy installed a handsome stone façade in front. Then they started on the huge backyard.

Still a work in progress, it’s beginning to shape up as a lovely park-like retreat. Fred has made a hobby of metal-working; when they built the house, he specified a separate, fire-resistant workshop, which you can see in some of the photos here. At the outset, they laid two large patios, one of paving bricks and one of flagstone. The flagstone surface was the only landscaping project for which they needed professional help. Otherwise, Fred and Kathy designed and installed the entire hardscape, the structures, and the plantings.

dcp_2467This shade structure was built of scrap metal. The entire thing consists of recycled materials. It casts a cooling, airy shadow close to the house’s covered patio, where, Kathy says, the two of them like to sip wine in the evenings and dream up new projects. Beneath it, they built (themselves!) a complete outdoor kitchen with propane-powered gear and a stone countertop. Taken together with the house’s built-in overhang, the flagstone patio, and the great room that opens into the backyard, the whole arrangement makes an awesome entertainment area. 

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(Click on the photos for larger views.)

But that’s just the beginning. In addition to the barbecue kitchen, they also designed and built a fantastic propane fireplace, complete with a Santa Fe-style wall and bancos. In this view, a protective covering is set in place over the firebox. The other evening, though, SDXB and I had the privilege of joining our hosts in front of this lovely hearth, where we watched the sun set over the mountains and the moon and stars come to vibrant life. That’s a young elm tree behind the structure. The flowering trees are Desert Museum hybrid paloverdes, an exceptionally beautiful xeric tree that, once established, provides great shade and hardly ever has to be watered.

dcp_2473Their latest development is an elaborate garden structure. Fred also built the framework in his workshop, although this time the metal was, I believe, not recycled. Here are Kathy and VickyC about to enter through the gated arch—the fencing discourages coyotes and can be equipped with a dog- and rabbit-repelling barrier. A couple of weeks ago, Kathy planted a pair of Lady Banks climbing roses, one on either side of the archway. It will take a year or two, but in due course these plants will cover the arch with flowering vines. The skeletal “roof” of the structure is designed to accommodate shade and frost fabric, which will protect tomatoes in the scorching Arizona summer and frost-sensitive plants during the chilly winter nights. 

They already have a healthy garden of tomatoes, peppers, squash, eggplants, herbs, and the like:

dcp_2475

The amount of work Fred and Kathy have done themselves represents savings in the tens of thousands of dollars. I can’t imagine what it would cost to have even one of those weather-resistant, termite-resistant metal structures built. An outdoor kitchen? I’ve never asked, because I can’t afford it. Outdoor fireplace? Doesn’t compute.

Kathy says that, except for the metalwork and the flagstone installation, most of the projects were not difficult to build. I think, though, that success with these projects requires meticulous care, knowledge of building codes, and understanding of how to design block and metal structures that will withstand the test of time. Clearly it’s not impossible to acquire these skills. The result is pretty amazing.

Saving: Every little bit helps

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The other day, J.D. at Get Rich Slowly posted an interview with his real-life “millionaire next door.” In a very interesting article, he made the point that you don’t have to earn a Wall-Street salary to accrue enough wealth to achieve financial independence. John, the interview’s subject, did it on a teacher’s salary. The trick, he says, is to spend less than you earn.

True that. I would add that it’s crucial to build your budget so that you do spend less than you earn by including a line item for savings, and then to foster the habit of saving everything else that you don’t spend on living expenses. Even if you’re fighting to get out of debt, at least some small amount of your total income can go into savings. Paid Twice sets the example for this strategy: despite setbacks such as the car crapping out, she and her husband persist in building emergency fund savings while beating back a debt load that started out at a depressingly large figure.

Thanks to the collapse of the Bush economy, I’m no millionaire, but I’m a great deal less perturbed about the pending layoff than one would expect, because I have plenty to live on despite the obligation to help with the mortgage on a second house. The mortgage on my own home is paid for and I have no other debt except a $21,000 loan taken out to renovate the downtown house. Suspecting the university would can me, I started setting aside enough money to pay off that loan last year and for the past several months have had enough to kill it. The reason I haven’t paid it off is that I felt I should hang onto the cash to make it double as an emergency fund in the event I lost my job.

I have, however, decided that next week I will pay off the Renovation Loan. Why? Because by the end of this year I’ll have saved another $24,000! That’s after setting aside enough to cover COBRA until Medicare kicks in and after paying the $1,200 for my car’s 90,000-mile service.

That will have happened because I don’t spend anywhere near what I earn.

First, I’ve always engineered the budget so that $200 a month goes straight to savings. While trying to accrue enough to pay off the Renovation Loan, I budgeted another $204 toward that (started out more, but GDU’s furlough days cut my net income by $180 a month). Once enough was saved for that purpose, I just kept on putting the extra amount in savings: a total of $404 a month.

Second, I have two side income streams, freelance editing and teaching. Every after-tax dollar from those activities has gone into savings. These income sources made it possible to accrue enough to pay off the second mortgage by the end of last year.

Having cut spending by $180 a month, in August when the furlough days end (so we’re told…), I’ll continue to put that much in savings, too. I should net about $5,000 from the three community college courses I’ll teach in the fall, and a conservative estimate of freelance income is about $200 a month, for a total of $1,600 between now and layoff day.

Staying on budget has allowed me to spend less than I put into the credit union accounts set aside for recurring expenses and for credit card charges (I charge everything other than monthly bills on the American Express card, pay it off each month, and collect a kickback of between $250 and $500 at the end of AMEX’s fiscal year). This means a fair amount has accrued in accrued in dribs and drabs and is just sitting in those two accounts. Here’s how that shakes out:

savingsfigs5-3-09

Projecting the amount the regular savings from my GDU paycheck should grow, by December 31, layoff day, I should end up with almost $5,800 to add to existing credit union savings:

savingsprojected12-09

Okay. Now let’s add to that the amounts I figure to net from teaching and freelancing, to arrive at the projected 2009 savings as of December 31:

savingsincprojected12-09

Amazing. The $12,380 I expect to squirrel away from net teaching and editing income plus routine savings from my GDU paycheck plus the $11,931 already on hand comes to $24,311.

That’s with a pretty conservative estimate of freelance earnings, and it doesn’t count the so-called “extra” paycheck coming in July, thanks to the crazy bimonthly pay schedule. Add another $1,200 (some of the “extra” paycheck has to be used to cover regular spending—it’s not really extra) and the vacation pay GDU will owe me in December (around $2,600) and you come up with a projected total of something over $28,000.

This will be my fallback fund in retirement. If utilities and healthcare bills exceed a given month’s income from retirement savings and teaching (as they will in the summer), this “cushion” will keep me from bouncing checks.

It’s come about because I spend a lot less than I earn! Whenever I take a side job, I put the money into savings. My budget covers only the amount I make in my day job at the Great Desert University, and that budget allows for a $404 monthly deposit to savings—soon to be $574, after I pay off the Renovation Loan.

scenario-1bEven though I’ll have to spend almost everything I earn once the day job ends, I’m still planning to deposit at least $200 a month in savings. Assuming I put $10,000 of the accrued savings into my main checking account, things will be tight: in a month when I’m paid for only two weeks of teaching, I barely squeak by. However, when the community college checks come in twice a month, I accrue so much extra that unemployment during the expensive summer months will not cause spending to run the bottom line into the red. I should start August with $11,650 in checking and end it with $11,508. After that, as utility bills fall, spending money rises. After all the bills are paid in December 2010, I should have about $12,970, leaving me $3,970 in the black at the end of the year.

That’s $3,970 that will go into savings…

Recreational Shopping: A change of habit

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Spent most of today hanging out with two old friends. All afternoon, we bucketed around stores in the shiny new shopping plazas of the western suburbs. Specifically, we wanted to shop at Pier One and Target. We weren’t after anything specific: we planned just to peruse the stores as an afternoon’s outing. In a word, we were indulging in recreational shopping. Shopping for the fun of shopping.

In times past, an activity like this would lead to the diddling alway of great sums of money. I do enjoy (even covet) much of the stuff at Pier One, and Target is a posted danger zone for me. Today, though, I found myself not wanting to buy much. Matter of fact, you could say I couldn’t bring myself to reach for the AMEX card.

Pier One had some very pretty throw pillows, which I admired greatly. VickyC bought a pair, absolutely gorgeous, soon to look splendid on her sofa: marked down significantly. Also at a good mark-down, Kathy got an attractive desk lamp, which she’s been needing since she kiped her husband’s for her own desk. But you know…my sofa has four perfectly fine pillows on it. Old, maybe; a little stale to my eye, since I’ve been looking at them for several years, but clean and in good repair. A couple of years ago, I would have justified buying new pillows on the grounds that a) I like them;  b) it’s time to update “the look; and therefore c) I need them.

In the year or two since I’ve dedicated myself to a more frugal and simpler lifestyle, something strange has happened. Where before want would morph to need, now something has to be a real need before I feel that I want it. It’s not a deliberate, conscious change. It’s a change of habit that has gone on long enough to become part of my psyche.

At Target, I did buy one thing that to an outside observer might look like an impulse buy: a rope hammock. A couple of years ago, I bought one of those arc-shaped wooden hammock slings from Costco, the trees here at the Funny Farm still being too young to support the beloved old Eddie Bauer hammock that had survived into advanced decrepitude. The Costco hammock is made of sturdy outdoor fabric, allegedly an improvement over rope. It’s not. A fabric hammock collects dust, leaves, bird droppings, seeds, and various other debris. Whenever it rains, a puddle materializes in the low point; tipping the hammock to pour the water out digs a hole in the desert landscape below it. And a fabric hammock just can’t compare to rope in the comfort department: that weather-proof fabric is hot, ungainly, and ungiving. 

For quite some time, I’ve known Pawley’s Island has a hammock that probably will fit in the odd-sized Costco stand. And it’s one of the things I’ve planned to buy before the salary runs out. I’ve just been too lazy to order it online, a process I view, perversely enough, as a bit of a hassle. So when I spotted Target’s version, made of cotton (not a saggy artificial fiber), I grabbed it. If it won’t fit, Target will take it back.

I used my old hammock until it fell apart, something like twelve or fifteen years, both for loafing and for laying out laundered clothes to dry flat. The once barren yard now has plenty of shade, and I know I’ll use a more comfortable, less annoying rope number a lot more than I do the leaf-ridden, dusty, clammy fabric thing. So in this case, I think “want” actually does rise to the level of “need.” I need something to put in that fancy wooden hammock stand, so it won’t go to waste and so I can enjoy laying in the yard when the weather’s balmy. Which around here is most of the time.

The other day on the way home from a client’s place of business, I passed Scottsdale Fashion Square, formerly a regular hang-out. And it struck me that it’s been a good two years since I’ve been in that place. Then I realized I haven’t been in the tony Biltmore fashion plaza for many a moon, either. I simply have dropped the habit of shopping for fun. I no longer bat around stores to pass the time of day.

This, I expect, will be a permanent change. 

Is there anything that’s changed in your habits, either because of the current economy or as a result of a deliberate decision to alter the direction of your life?

Home Security: Cheap (sorta) burglar discouragement

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Argh!A fine young locksmith I met a few weeks ago came up with an idea that might help protect my priceless valuables from the wave of burglaries the neighborhood is enjoying. I’d asked him if he felt installing (ugg-leeee!) steel security doors was worth the extravagant cost, and he said all a burglar needs is a crowbar to bust through one of the things. He suggested instead that you install a sturdy solid-core door on your home office or a bedroom and put a good strong deadbolt on the thing. Put your computers and whatever else you cherish in the room, and then treat its door like any exterior door: lock it before you leave the house.

He also recommended bolting a fireproof, burglar-proof safe to the floor in the same room, to keep your papers, jewelry, and pistols. You should, of course, have a gun safe for any long guns you choose to keep. 

Lowe’s sells solid-core interior doors for under $200. A double security door to protect even one of the three sliding doors in back would run me over $1,000. Truth to tell, I own little of value; the only thing I’d rather not have stolen is the computer, which contains my entire life. A few negotiable instruments and my father’s Ruger also could stay, if the burglar wouldn’t mind too much.

The Lowe’s door guy pointed out that even a solid-core door is vulnerable a vigorous kicking job. The locksmith extraordinaire counter-pointed out that to break through a solid-core door with a heavy-duty deadbolt and a heavy-duty strike with extra-long bolts extending into the studs would at least give the burglar a sprained ankle. 

So this morning I ordered the door; this afternoon the Lowe’s guy came by to measure; tomorrow morning I’ll run past the locksmith’s to buy his version of a killer deadbolt. For less than a fourth of what one double security door would cost, I’ll get some modest protection for the office. The room fronts to the street, and a fiercely thorny rose bush grows under the window, so it’s unlikely the burglar will try to get in that way. The window has some serious security on it, anyhow.

Of late, our burglars have been a real squat-and-run set. They watch until they see someone leave, then they jump the back wall and break in a back door, race through the place in ten or fifteen minutes, and are outta there. Because they know it takes the cops about that long to get here, they move very fast. So there’s a good chance that a tough lock and a reasonably resistant solid-core door will discourage them. 

Hope so, anyway.

Utterly Deadly Pecan Pie

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OMG! Have you seen Mary’s Carmelized Banana Tarts over at Simply Forties? To die for!

Mary’s spectacular performance reminds me that I’ve promised, off and on, to put up my mother’s recipe for pecan pie, the one that used to dissolve my father. I think she got it from Marjorie Kinnan Rawlings’s Cross Creek Cookery, which came out in 1942. It it were me, I’d add some bourbon.

You need:

4 eggs
1 1/4 cups cane syrup
1 1/2 cups broken pecan meats
1 cup sugar
4 tablespoons butter
1 teaspoon vanilla
1 raw pie shell (store-bought or home-made) 

Preheat the oven to about 350 degrees.

Boil the sugar and syrup together two or three minutes. Beat the eggs not too stiff; then pour the hot syrup into them slowly, stirring. Add the butter, vanilla, and pecans. Turn into a raw pie shell and bake in a moderate oven about 45 minutes, until well set.