Financial planning

I feel the need to underscore the importance of good financial planning not really for anyone’s benefit but, frankly, because some people have routinely pissed me off criticizing my recent corrections to my own budgeting problems. I’m getting tired of it; it’s not enough to have nothing to prove, not when “I bought something” results in “OH MY GOD YOU’RE POOR BECAUSE YOU SPEND ALL YOUR MONEY LOLZ IDIOT” all the fucking time. So here’s a peek into my money life.

First off let’s talk about bad financial management. In the beginning of this year, I spent a good $4000 between January and late February. I decided to learn to play guitar, and basically trashed my cash buffers on a guitar, an amp, pickups, learning materials (books), and the like. That plus spending at MAGFest took me down a few notches nice and hard. At the time I had no job and still squeezed my funds down to nearly nothing!

So I started saving money. At first I tried a $400 budget for personal spending, which I routinely broke ($800, $900) due to improper spending and one planned large expense (a guitar). By May I had $2000 saved away, which went to a $1400 state tax back-pay. I had $500 on hand, my truck broke, and I had to get my parents to cosign for a car loan… and let them talk me into a new car instead of a good used vehicle. Still not getting it, but I’m doing a little better.

It was at this point I began seriously budgeting my money, looking at the charts and graphs my accounting program generates and examining the income reports for a more fine-grained view (I didn’t study accounting as an elective for nothing). I started at May, faltered a little, cleaned things up and continued into June. I set my new personal spending maximum to $250, but didn’t stop there; I added two more dynamics to my budgeting: net income planning and time planning.

“Net income planning” is just a fancy way of saying I need to save some money every month. In my case, I want $1000 a month of net income, and preferably $1000 of liquid assets (some of my money goes directly to investment funds, and I count that as if it’s already invested as soon as I have it). If I miss either of these, I examine the month to determine why; likewise, if my income or expenses change for a specific reason I adjust this goal to remain both realistic and prudent. When I get a raise, for example, I should increase my target saving.

“Time Planning” directly addresses mid- and long-term considerations. I want my car paid off at the end of the year, so I should have $10,000-$13,000 on hand by then to do so. I want to be able to plan my moving out starting January, with the realistic ability to do so at any time; my net income should allow for the cost of rent and utilities by January, and I should have a realistic amount of money for a buffer by February. I want to get a different car; more on this later, it’s complex.

So this all sounds well and good but what about actual performance? I stayed under $250 personal spending in May by $20 but pushed to $322 in June. July I opened with $100 on Guitar Hero and figured I’d stay under $150; computer broke, and it has no such budget, so in order to satisfy net income and time planning constraints I’m going to make a mental note to recover that from my personal spending over time. It seems I’ll just have to hold back on those new guitar pickups until after August to make sure it’s safe.

Okay, so I’m wobbling over the line on my own fault, and by sheer chance I’ve been thrust past my own restrictions and have to do a little work to get back on track. These things happen. I actually have the money to handle it; moreover, I can negate the effects entirely. As for the overspending… I’m about $100 off, and siphoning $160 to correct a small bump, so I’ll likely buy a $50 game or a couple audio CDs in the next 2 months and leave it at that.

I missed my net income goal, totaling about $750 instead of $1000. Blame a dentist visit and the year’s subscription to Amazon Prime. I’ve incorporated some ramen and some less expensive drinks for food, which should reduce my food costs by 60% max; I’ll likely get other food and keep that around 40%. It seems there were some one-time issues along with the overspending that just pulled this down; it’s still marked improvement, and I’ll do better this month.

My time planning is on shakey ground. I’m looking forward to the end of August; I’m being sold off by a contractor, to another contractor. During this time, my current employer takes a large chunk of my would-be pay as overhead; I should get a good raise when I move to an employee of the second level contractor, plus they have actual good medical benefits so I can save another $282/month. The numbers I’m estimating here are predictions and could fall higher or lower: $10/hr for 6 months, 26 weeks, my employer makes $10400. We shall see.

On this prediction, I should have my car fully paid off at the end of the year; really, I’ll have a large chunk of money that I can just kill the remainder off with. Also, with the level of income, I’m fully stable to move out; I will start a real apartment search in January, and save money for a good cash buffer. This leaves me one more goal to throw in: A new car.

I don’t want my car, I want a manual; in fact, I want a $30,000 Mustang with a lot of perks. I want it at $300/month, which means I need a trade-in and down payment combined somewhere around $15,000 at 6% interest, maybe at 10% $18000. This creates a complex decision: If I get the car it will set me back moving out by about 2 months at a minimum, or more if I hold out for a better down payment (and a better financial position because of smaller payments). if I move out first, I’ll be set back getting the car by exactly 2 months.

This decision is interesting because if I move out first, I’m set back 2 months getting the car; if I get the car first, I’ll also regenerate a cash buffer for moving out faster. In either case, a bigger down payment helps me by getting me smaller monthly payments; this sweetens both options. Waiting to move out means I save more money faster, and can quickly improve my long term financial situation; but this option inherently encourages me to get the car first, since at that point there’s a big enough buffer for me to seek an apartment immediately. Moving out first means I can wait longer for the car and not have to stay at home, which takes some of the pressure off to jump the gun on the car.

Now for the interesting part. Current projections indicate that my entire year’s personal spending, if kept to the budget, would set back either of these plans by about 2 weeks. For long term investment, the opportunity cost over 10 years is about $60,000, the opportunity cost of the car is similarly $60,000, but if we deduct the trade-in (assume $10,000, but I’ve considered down to $7,000) it’s only $40,000. Based on my general investment plans (when I have excessive saved up cash, invest it), I’ll have between $600,000 and $700,000 by the time I’m 30 (with luck and good investing I can possibly break a million, but it’s hard).

These projections don’t consider buying a house, and that’s expensive. For that I’m thinking I need to save up for 2-4 years, in an apartment, to make a 20% down payment. This gets me out of mortgage insurance and also reduces my interest and monthly payments. This in itself has opportunity costs, as I’d like to keep much of that liquid in my savings account rather than in strategic investments or a mutual fund; then again, I need to learn to strategically sell to extract the money when needed anyway (instead of just to get the money into a better investment). I’ve got time to think about it.

If you’ve actually read this far you might have noticed I’ve got some shakey predictions for where my money’s gonna be coming from. You should also take note that all my big-spending plans fall somewhere after those variables are known, instead of just launcing on the (possibly bad) assumption that I’ll have more money soon anyway. If my income predictions totally fall through, I’ll be set back a lot; my personal spending will set me back maybe 2 months per year in and of itself. On strict numbers that means I should reduce it to $75/mo; but, it’s at a comfort level for me, and in the long term is dismally insignificant.

Now people stop fucking bothering me with my finances every time I say I bought something. I know perfectly well where it’s at and what I’m doing and I’ve got everything under weekly examination and make predictions, projections, and analysis of how effective I’m managing my budget every month. I’ll definitely take notice if I’m spending too much, and I’ll figure out why and fix it; and it’s damn immaterial if I spend $50 on something I can get for $30 next year out of my controlled personal spending.


~ by John Moser on June 30, 2008.

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