Coffee heat rising

Money Happens: Planning ahead through 2011

Reviewing the first quarter of post-Canning Day finances, I’m amazed to discover that I’ve not been spending as much money as I budgeted, and not anything near the amount that’s been flowing into the checking account. In fact, on average I’ve spent about $1,100 a month less than income!

The reason for this, of course, has been the part-time teaching, which will end in May and bring in nothing for two and a half months, when expenses rise into the stratosphere.

But…but my $805/month nondiscretionary budget, which includes those soon-to-be-stratospheric utility bills, is based on the bloated summer rates. So in theory, as long as I stay within the discretionary spending budget of $800, even in the summertime I shouldn’t be spending much more than $1,600 a month. In June and July, my income will drop to about $1,390 a month (maybe less, if I put my latest scheme in action—see below). That’s about $210 short. But with $3,400 sitting there from the first-quarter budget underruns, in theory it shouldn’t matter. Those two unpaid and two underpaid months would eat up only about $420 of the three thousand bucks residing there from the first quarter.

Here’s how this shakes out:

Yipe! The average monthly net left in my checking account, income minus expenses, has exceeded $1,100 a month!

Part of this happened because Social Security has been dragging its feet on withholding income tax from the benefit it’s paying. I’ve now asked three times and am assured that in April my SS payment will be $1,008, down from $1,257.

So, in April Social Security income drops about $250; in May teaching income drops in half and in May and June drops to zero. In August teaching income starts up again, with one paycheck that month, two a month from September through November, and one again in December. Net Fidelity income is $389 a month, giving me a net income of about $1,389 in June and July. For the entire year 2010, the result looks like this:

Can that possibly be correct? This suggests that teaching 3 and 2 and collecting $385 net a month from the Fidelity 403(b) will leave me with a surplus of over $9,000 at the end of the year!

Amazing, isn’t it…

Well, the state General Accounting Office demanded that I take a drawdown from my Fidelity 403(b), lest my request to collect my RASL be rejected. This worked contrary to my purposes, because that money needed to be left in investments in hopes that during the time I still have the strength to work, it will recover some of the losses incurred during the crash of the Bush economy. So I asked for $500, the least I thought I could get away with. The net on that is $389 a month.

The fact is, now that the first of the three annual RASL payouts has been approved and transferred to my keeping, it’s unlikely the RASL administrator is going to notice what’s going on with my drawdown. So, I’m thinking I should continue to draw down $500, but have only $100 deposited in checking, rolling over the remainder to my big IRA, which is professionally managed and doing quite well. Another advantage of this strategy is that it would drop my gross income into a lower tax bracket and might insure that none of my Social Security would be taxed at all.

To get 100 after-tax dollars in my sweaty little hand, I’d have to ask for a $125 transfer to checking (i.e., $125 – 20% tax = $100). This would leave $375 a month to roll into the IRA: $4500 a year. It would look like a $500-a-month distribution, but in fact the lion’s share would be extracted from the plain-vanilla 403(b)  into my better-managed IRA with no tax consequences.

In terms of my cash flow, what would happen? Collecting $100 instead of $389 a month would remove $2,601 ($289 x the remaining 9 months) from the bottom line above for 2010:

Okay. So, what if I cut Fidelity income to $100 a month for the entire year of 2011? Could I survive? Let’s assume a 3% inflation rate for expenses, since everything but our paychecks is going up fast. In this scenario, I again teach 3 & 2 instead of 3 & 3:

Huh. Almost $5,000 left at the end of the year. These figures translate to after-tax funds I can use to pay toward my share of the mortgage ($9,000 a year) in 2011 and 2012, delaying serious drawdowns from retirement savings another two years!

So, if there’s that much play in the budget, why on earth am I working at all? What would happen if I didn’t teach in 2011 but instead collected the net $389 on a $500 monthly drawdown from Fidelity?

Yes. The Copyeditor’s Desk, Inc., would earn enough to cover the shortfall and more over the course of a year. As we come to the end of the first quarter, the corporation is holding $2,218, and I’m doing precious little freelance work! Net after a 20% tax payout would be $1,774. That’s for a single quarter in which I’ve made no effort to find work.

Teaching one section would net $1,920, more than enough to break even.

I have to ask you, isn’t that the most amazing thing you ever saw? I can’t believe my expenses are that low in this four-bedroom house on a quarter-acre with a big pool and a forest of fruit and ornamental trees.

And yes, it has occurred to me to wonder if I’m being too frugal here. Surely I can afford to get my hair done by a better stylist than the $30 guy—last week he left me with a tuft sticking out at the neckline and a kind of box-like cap on top. Possibly I can afford to buy some clothes somewhere other than Costco. Or, who knows? Maybe I could even afford a cell phone.

I don’t feel like my life is pinched. I still shop at AJs and Whole Foods; I still buy plants at the fanciest nurseries in town. So…is this money happening, or what?

In the money happens department…

This is weird.

Yesterday I sent off my tax returns, bearing news to Uncle Sam of the startling amount of money I made last year. Think of this: even though my gross income in 2009 was 2.5 times what it will be in 2010, the net that I’m living on just now is more than my 2009 net!

Is that bizarre?

The only difference is that the university was withholding money for various “benefits.” Still, none of those cost as much as COBRA or Medicare—my health insurance cost me $36 a month, a far cry from the $220 I’ll have to pony up for Medicare, which will be absent dental insurance (about $5 a month at GDU). My ASU net was reduced by contributions to the 403(b), although not by very much. When my pay was not being cut $480 a month by GDU’s furlough strategy, take-home was $3,000 a month. Today…well, check this out:

That’s teaching three sections a semester, or six sections a year. This year, though, I’ve decided to cut back to two sections in the fall, so as to be sure not to offend the Social Security nabobs by exceeding that worthy entity’s earning limitation. So, what will happen in the fall?

Almost $430 less than I was earning at GDU…but still more than what, in full bag-lady syndrome mode, I budgeted to live on. The present monthly budget is $423 less than that:

Now, during the summer when there’s no teaching income, my net will fall way below budgeted expenses…at a time when expenses expand to fill all available space. However, because I’m spending way less than $1,625 in the winter, when I have to run neither the air conditioner nor the heat (and because the discounted COBRA is significantly cheaper than Medicare, which kicks in on May 1), I think there’ll be plenty to cover summer expenses and get by fine in the fall even without the third section of freshman composition.

I figure the five summer months will cost about $1,000 more, all told, than it costs to live through five cooler months. On average, I’ve spent about $222 a month less than I’ve been bringing in this winter. That means that by the end of March I’ll have about $667 saved from budget underruns. So, I need only another $333 to accrue the extra thousand bucks needed to cover the higher summertime water and electric bills; that is, in April and May I’ll need to come in $166.50 a month under budget. Even though bills will start to rise in April, I think that should be doable!

It boggles my little pea brain that I could be netting more than I earned at GDU by teaching three piddly classes of freshman comp, a chore that most weeks occupies significantly less than half-time. That wouldn’t be possible without Social Security…or would it? This year I’m not drawing down anything like 4 percent of savings. If I were, the net would be $600 more than the gross from Social Security! So in fact, you could argue that even without Social Security I would net more in less-than-semiretirement than I did while I was working full-time.

I don’t know whether this is a statement on how little Arizona State University pays its faculty (you net less than you would scrounging together a living with Social Security and $2,400/course adjunct teaching gigs???) or on my own obsessive saving habits. But it’s weird.

Financial Freedom: Building the bankroll, part 1

In the quest for financial freedom—the search for a way off the day-job treadmill—it’s important to build the habit of living not just within your means but below your means.

When you live within your means, you spend no more than you earn. In living below your means, however, you spend less than you earn. This allows you to put money aside for future use; to wit, early retirement. The scheme is pretty simple:

Live below your means;
Save a specific amount each month;
Also set aside whatever else you don’t spend;
Stash your savings in investments and leave it there.

Saving is a strategy you can start at quite a young age, from the moment you begin to earn. My first full-time job paid a grandiose $300 a month. After paying the rent, I had $200 to live on. From that I budgeted $15 to buy myself some clothes or shoes and $20 to put into savings. Following the old adage, I always paid myself first. We didn’t have automatic electronic funds transfers in those days; I had to physically go into the bank to deposit my paycheck, and while I was there I had a share of it deposited to a savings account. If I hadn’t spent the previous month’s clothing budget, I transferred that or the amount remaining from it to savings, too. I still do the same today, only instead of $20 I put aside $200 plus anything else that doesn’t get spent.

It doesn’t sound like much, but over time it adds up. And when you’re young, your greatest financial asset is time. Twenty dollars a month invested at 8 percent starting in, say, 1967, when I began working, today would amount to $89,498.86. If you began investing $200 a month today and worked for twenty years, in 2030 you’d have $117,804. That’s a respectable amount, especially if you’re saving from after-tax income so that this is on top of your 401(k) or 403(b).

Yes. That’s what I’m talking about here: not only investing before-tax income in whatever savings plan your employer offers, but also setting aside something from take-home pay.

For most people, $200 a month is minimal. In fact, while I was still working I was setting aside about $370 a month, plus whatever was left over from my general operating expenses. Over 20 years at 8 percent, $370 a month would add up to $217,937.55—about as much as my 403(b) accrued in 15 years with matching contributions from my employer. In other words, the habit of saving and investing on your own can double your retirement savings…and at least some of it will be in instruments that you can access before age 59½, a crucial factor for those of us who do not intend to stay in the traces until we drop.

Even if your earnings are modest, it’s surprising how many ways you can find to unearth cash for savings and investment.

If you’ve recently succeeded in paying off debt, then you know that you can break loose a certain number of dollars from your income for purposes other than mere survival and indulgence. If that’s your case, instead of diddling away the newly freed-up income that you were having to use to service debt, put it into savings.

If you’re using the “snowball” approach to debt payoff, once you’re out from under the debt, put the snowballs into savings. If you’ve “snowflaked” debt away, keep on putting every little windfall aside, only put it into savings and investments.

Similarly, when you get a raise or move to a better-paying job, don’t change your standard of living. Put the increase into savings.

More proactively, start a side income stream and invest all the after-tax proceeds for the future. My freelance endeavors, for example, have earned around $8,000 to $10,000 a year. Eight grand amounts to about $666 a month; invested at 8 percent over our 20-year period, it would add up to $392,288.

Living below your means entails downsizing before you upsize. Instead of buying the biggest, most grandiose house you can afford, for example, buy a more modest but comfortable house. Or rent instead of buying and save the difference between the rent payment and mortgage payments for comparable digs. Refrain from buying the largest, fanciest vehicle your paycheck will support; get a car you can pay off quickly and use the amount you’d have to put into payments to build your Bumhood stash. Find better ways to entertain yourself than sitting in front of the boob tube, and then ditch the cable TV. Get rid of the land line. Learn to cook, and eat better for less by eating in instead of haunting restaurants.

If you never develop the habit of buying more than you need, you’ll never miss what you don’t have. Obviously you don’t have to live like an anchorite. But too many apparently middle-class Americans fail to distinguish between indulging their wants and providing for their needs. As a result, they’re really not in the financial middle class: they’re actually poor folks who are in way over their heads.

By April of 2009, the average household saving rate was only about 4 percent of disposable income. Let’s say you have $48,000 left after taxes from a $60,000 household  income: that would give you an annual savings rate of $1,920—significantly less than the rather modest $200/month we started with in this discussion. If your 4 percent includes your required contribution to an employer’s deferred saving plan, then you’re not even putting $160 a month ($1,920 ÷ 12) aside from take-home pay.

Meanwhile, economists at the Federal Reserve estimated (also in 2009) that despite the slight increase in U.S. households’ savings rate, most savings were going to pay off debt, which had accrued at a staggering rate during the recent boom, when consumption far exceeded income. To eliminate this household debt, the Fed observes,

Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018.

Clearly, if you start out with little or no debt and never accumulate debt, instead of pouring your savings into some already spectacularly wealthy banker’s pockets you can put your money to work for you. Living below your means is, then, the first stage of building your Bumhood bankroll.

The Financial Freedom Series

An Overview
The Health Insurance Hurdle
Own Your Roof
Building the Bankroll, Part 1
Building the Bankroll, Part 2

Don’t Panic: A sign of light

Frugal Scholar had a bit of a meltdown as rumors of 25 percent cutbacks swirled through her campus. This kind of talk is unnerving, especially since we know that when layoffs loom, the talk that precedes them often comes to pass.

There’s certainly no real evidence that the economy’s alleged recovery is affecting the average Jane and Joe at the state level. Here in Arizona, the state and cities are at the point of canning firefighters and police, and we’re told that unless we vote in the proposed tax hike—which we probably won’t, this being a Kill-the-Beast sort of place—schools will be shut down and cutbacks will be Draconian. Real estate is still worthless, and while the media yelp enthusiastically over openings at this and that megacorporation, they’re all minimum-wage burger-flipping, shelf-stocking, and housekeeping jobs.

But…some individual stories offer a glimmer of  hope. Tina, a.k.a. The Kid, landed herself an editor’s job in the College of Business out at the Great Desert University. Pay isn’t great, but it’s a helluva lot better than the College of Liberal Arts and Sciences was paying her. A paycheck could fall way short of that and still be an improvement: she earned more in five hours waiting tables at Applebee’s than we paid her in a week. What she’s earning now at least apes a normal wage. And, because the journal has private funding, she will get occasional bonuses that, mirabilis, will not be paid through the rapacious state of Arizona.

Meanwhile, she had a bunch of freelance gigs pending, all of which had been sitting there for quite some time and none of which were doing anything. She had given up on them, figuring it was all so  much hot air.

Now, however, the largest of those putative clients wants her to manage a textbook project. Pay: $39,000, more than the enhanced new salary at GDU. Add that contract to the day job, Applebee’s, and her other contracts and, says she, in 2010 she could rack up as much as $100,000!

Not bad for a liberal arts graduate. Not bad for cobbling together a living from a bunch of different sources.

She’s now considering farming out this work to her fellow editorialists, keeping a finder’s fee for herself. This strategy will bring a few bucks for her and keep her clients on the string, so if the job falls through for any reason (it is ASU, after all, and ASU is the State of Arizona, an institution in shambles), she’ll still have the freelance work to fall back on.

Another friend was offered ten grand to do a book project but turned it down because she has enough work, thank you.

So, the post-layoff world is not altogether bleak. It is possible to turn up work here and there (some of it paid in cash), and my experience is confirming SDXB’s assurance that it doesn’t cost anything like what you expect to live in Bumhood. I’m now not only not sorry GDU laid me off, I’m glad of it! Wouldn’t go back to work full-time on a bet.

New refinement on Year 1 retirement strategy

So far—all of two months into this new Bumhood adventure—I’m doing so well at staying on budget and living within my apparently reduced means that I’m thinking next fall I should teach two sections instead of three.

The community colleges pay $2,400 per class. Six times $2,400 comes to $14,400. Contrary to predictions, Social Security did not raise its earnings limitation this year: it remains at $14,160. While I certainly can afford to sacrifice half of $240 for the privilege of earning slightly more than a sub-poverty wage, I can’t afford the way they expunge it from your pocketbook. As soon as SS find out that you’re over the limit, they take away an entire month’s payment. From that they withhold the amount they think you owe them. But they don’t give the rest back until the following January. So, that’s $1,000 that goes away for months, maybe as long as a year.

My net on one section is $2016. True, it’s twice as much as a thousand bucks, but prorated over four months, it’s only $504 a month.

Meanwhile, I have over $16,000 residing in savings now. Because I started with a $14,500 cushion and so far have not spent anything like as much as I expected, the “cushion” keeps accruing feathers. Every month, another chicken’s worth of feathers gets stuffed in there. In addition, The Copyeditor’s Desk has $2,000 remaining to pay out in “dividends.”

When SDXB said you don’t need anything like as much as you think to live well in retirement, he wasn’t kidding. At the moment I’m coming nowhere near using all the money I budgeted to survive. That will change in the summer, when utility bills rise into the stratosphere, but by then enough will have accrued from the monthly underruns to cover those extra costs. It’s amazing. The guy is right: money happens!

Standing down off one section in the fall presents several sterling advantages:

1. Bureaucratic hassle avoidance. Not having to deal with Social Security over an earnings limit violation is worth a great deal. After the endless fights and negotiations with ASU’s HR department, the shape-shifting COBRA monsters, and now Medigap insurance predators, I have developed a bureaucrat flinch reflex.

2. Reduction of taxable income. Of course, it’s not enough to drop me into the lowest tax bracket. However, as it develops, Medicare, Medigap, and COBRA premiums are regarded as tax-deductible medical expenses, as are my long-term care premiums! Those will add up to at least $3600 this year. That’s 13 percent of an income cobbled together with Social Security and five sections. And that will make those costs deductible, even if I do earn a small wage from the S-corporation this year.

3. Brief reprieve from freshman comp. Since I’ll be teaching one section of magazine feature writing next fall, taking on just two sections will leave me with only one section of composition to have to struggle through. If I’m lucky and the section is 102 instead of 101, then I’ll have only three papers to have to grade for that course.

4. Hugely reduced course load. The feature-writing course is an eight-week online section. The chair has already agreed to make one of the comp courses he expects me to teach next fall an eight-week session, so that at any given time I’ll only be teaching two sections. If he stands by that, then I could end up with one composition course in the first half of the semester and the feature-writing course in the second half.

Hot dang! This would get the dratted comp class out of the way in eight weeks. The feature-writing course is online, and so for the rest of the semester I wouldn’t have to go to campus at all. At 19 miles per gallon, that represents a nice little saving in gasoline. And it sure represents a pretty saving in workload.

While I enjoy meeting with the young people and watching them bounce around, freshman comp is a discouraging class to teach. Especially in the community college, a good portion of the students struggle with serious learning problems and ESL issues. There’s very little you can do to help them. Really, in one semester there’s nothing you can do to make up for the shortcomings of 13 years of third-rate education, and there’s nothing you can do to change the way a dyslexic young adult’s brain is wired. You can’t teach them in 16 weeks what they didn’t learn in 13 years of K-12 training. It’s frustrating, and in many students’ cases, it’s just downright sad. So…any time I can get out of a section, I’ll be happy to do it.

Now, this scheme has some significant disadvantages, too.

1. Summer bills will deflate the cushion by about $1,200. This amount would be recovered by October if I’m reaching three sections.  By the end of December, I would have plenty of cash to carry me over the winter break: barring a huge unexpected expense, around $4,800.

However, in reality that’s way  more than I need to survive for a month of unemployment. With one fewer section to teach, I’ll still be back in the black by the end of October. The amount accrued to make it through winter break would than be about $3,300, more than enough to get by when utility bills are low.

2. Boredom factor. Teaching two sections will not give me enough to occupy my time. I’ll have to come up with new things to do.

That may not be a bad thing. 😉

3. Boss annoyance factor. The departmental chair thinks he has me for three sections this fall. He won’t like having to hustle up someone else to teach a section of composition on short notice. Given the precariousness of my position, I hesitate to annoy this guy or bring myself to his attention in any negative way.

I really can’t make this decision until I get my tax forms. When ASU was jacking us around with furloughs, I changed the number of exemptions on my withholding, as to retain enough income to  live on. I never changed them back. Then at the end of the year I changed the amount withheld for Arizona’s rip to the minimum amount, so as to avoid having any more money gouged out of RASL and my vacation pay than absolutely necessary. This means that instead of having a refund coming, I may have to pay taxes this year.

Tax Lawyer has the mountain of paper I shipped to her office. It’s an incredibly complicated mess. She said she expects to have the returns ready the middle of this week. So it will be several days before I know whether I’ll have to pony up a chunk of the cushion to the government. If a lot of that money goes away, obviously I can’t take a chance that there won’t be enough to support me through 2010.

The longer I delay telling the departmental chair that I won’t be teaching three sections in the fall, the larger the headache for him. Hence, the greater the Boss Annoyance Factor.

However, the community colleges are not the only places to find freelance teaching work. Because I’m experienced in developing online courses, the fact is I can teach for any college in the nation. With the extra time freed up by dumping that third section in the fall, I could hustle up some jobs in other states, which might pay better than the District does. In 2011 I’ll be allowed to earn as much as I can, and so it would be useful to find someplace that pays more than $2,400 per section. Someplace that’s not ASU: I could earn about $3,200 teaching there, but I really want to be done with ASU, now and forevermore.

Speaking of teaching…time’s a-wastin’. Gotta run!