[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]
Time has come to set forth financial goals for this year. We are playing the catch up game. Ideally we should have been ready with our goals at the beginning of this year. But it took us a while to gather data and analyze our performance for 2007. A primary presumption while we set our goals this year is that our employers will give us a raise of at least 4% which will take care of inflation. It is to be noted that our goals and subsequent budgeting will be based on our household's after tax income. Also, our emergency fund is in place.Automatic Savings - Pay ourselves first!
In this category we shall list targets that can be taken care of by automatic deductions from our salaries. Stated in another way, this is the money we never see since it is automatically deducted from our checking accounts as soon as we get our paychecks.
Max out 401(k) contributions - Like last year we would like to max out our 401(k) contributions. Though we do not get matching contributions from our employers, 401(k) is still one of the most effective instruments to use the power of compounding and defer taxes.- Max out Roth IRA amounts - The maximum that we can contribute to this account is $4000 per person per year. We will try to save for the maximum possible. But our final contribution will depend on our modified adjusted gross income (MAGI) for the year 2008.
- Allocate around 29% of our monthly salaries to our portfolio - In 2007 we observed the stock market going up and down quite dramatically. In an effort to optimize the cost price of our portfolio's assets, we are planning to invest either monthly or quarterly instead of an annual purchase. This will help us to take advantage of dollar cost averaging.
Automatic savings was the easy part. Now we come to the tough part of savings which depends on creative budgeting and disciplined execution of plans. We will follow the concept of SMART (Specific, Measurable, Attainable, Realistic, Timely) goals to increase our chances of succeeding in sticking to our budgets.Assuming that we are going to spend same dollar amount this year in various categories, we have to take care of price rise due to inflation. The next step comprises of anticipating the rise in living costs and fine tuning our expenses to have a smooth sail. From experience we have seen that it helps to divide living expenses into two parts:
- Increase Expenses Bin - one covering the categories in which there will be a definite increase in costs.
- Decrease Expenses Bin - the other in which there are chances of minimizing costs by our own efforts.
Increase Expenses Bin
| Category | Monthly Increase | Notes | |
| $ | |||
| Rent | $72.08 |  | |
| Insurances | $5.02 | ||
| Cell Phones, Internet | $111.06 | New plan with wireless broadband card | |
| Utilities | $7.43 | ||
| Cars | $42.91 | Unexpected Repair costs | |
| Travel | $35.69 | ||
| Education | $12.50 | ||
| Total Increase | + $286.70 | ||
Decrease Expenses Bin
| Category | Monthly Decrease | Notes | |
| $ | |||
| Food | - $29.49 | Cook & Freeze |  |
| Household | - $169.83 | Bargain purchases of electronic goods | |
| Medical | - $24.05 | Exercise, eat healthy food | |
| Entertainment, Hobbies | - $75.68 | Fewer Movies | |
| Miscellaneous | - $4.46 | ||
| Total Decrease | - $303.50 | ||
[Perhaps the figures in the tables look like data from a scientific experiment :)! We copied the exact dollar amounts as churned out by our custom spreadsheets. In reality these numbers should give an idea of what our targets ought to be.]
The Increase Expenses Bin shows a monthly increase of $286.70. If we can implement our budget meticulously then our Decrease Expenses Bin will save us $303.50 monthly. That will leave us with an extra $16.80 each month from our living expenses. In the months when we stray away from our budget this tiny extra buffer can help us stay on path :)!
In a nutshell our tangible goals for this year are:
- Max out annual contributions to 401(k) and Roth IRAs.
- Automatically deduct 29% from our paychecks every month to fund our investment portfolio.
- Take actions to stick to the monthly goals in the Decrease Expenses Bin.
- Increase our income by investing time and energy in worthwhile side businesses.
We are eagerly looking forward towards your opinion and personal experiences regarding budgeting and tracking of living expenses.
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