My 2012 Financial Goals: First Look

It's time to put the personal in personal finance and talk about some of my goals for the coming year. 2012 is going to be a big year for me. 2011 was my highest earning year ever. 2012 is hopefully putting some of that money to work and then working towards some of my major goals.

A big deal for me in 2012 is I'll be going down to being a single income earning household. Having dual incomes is pretty nice. It gives you some amount of comfort and insurance against one of you losing their jobs. I will be the primary earner and my spouse is going back to school. So as many of you can guess, loss of income is only a part of this transition as is saving money for school.

Budget: I'll admit I've kept a "budget" and tracked spending for years. But it seems like I've only tracked spending. When we go over we just shrug our shoulders and move on. That wasn't going to work. We really needed to get used to getting by on less. So with about six months to prepare I started at a budget that was close to our normal spending and only a little bit more frugal. As we get closer to the end of the six months the budget will get more and more stripped. But we needed to practice. So January was a practice month and I'll report back on that some more in February to see how we did.

College Savings: I've had a 529 for several years now for my spouse but it's not very big. In 2011 I doubled my contributions to it from less than 1% if my income to about 2%. Still, I don't live in a state where there are strong tax benefits for a 529 so it's not my primary college savings vehicle. It now has about 4% of what I expect college will cost (assuming no scholarships or aid). I'm hoping to get that up to 7% by the end of the year, and about 12% by the time it's actually needed. One could argue that's almost nothing. But I think any little bit is better than nothing. And I do have other savings, but this can't be touched until college so it's a nice safe place to keep it in a very conservative 529 portfolio.

Debt: Last year we had to make a tough call on a car. Fix something that cost about what the car was worth, and risk it going out again while my spouse was not working. Or go ahead and buy a newer car while we still had time to pay it off. I started off with about $15,000 in car debt (ugh! I know!) In 4 months I've gotten that down to less than $10,000. I hope to use my tax refund to kick it down a little more. But this is the primary motivator for the budget subject above. I need to save a set amount every month to pay down the car. Technically it's a 3 year car loan at 0.99% interest and if I paid the car payment amount I could pay it off in another two years. But I don't have two years. And I don't want to carry around this debt with me much more.

Mortgage Debt: In 2011 I refinanced from a 6.25% interest rate to 4.5%. Saved myself a lot of money in my monthly bill. This year I plan to switch my home insurance (though I suspect savings will be minimal as both are discount insurers). But counter intuitively, I am putting my home on the back burner. I'll just be paying the minimum every month for the foreseeable future, or at least until my spouse is done with school. Other goals are more important at this time and paying down the home will become an issue again once we have two incomes or as my income continues to grow.

Retirement: This is tricky. I've been contributing to a 401k now for about 6 years with a 403b rollover from a previous employer. My spouse also has about the same. For most of that time we've been paying in 10%, paying way more than the match at either one of our places. In 2010 I started a Roth IRA but put far less than the limit in it each year. My workplace recently added a Roth 401k so I've moved most of my regular 401k contributions to the Roth 401k. It's also hard to see the Roth IRA as a priority with the looming debt and necessary college savings. So I intend to keep contributing to it, but again, probably less than the max. I'll still keep my overall 401k contribution at around 10% because that's an easier amount to deal with when it comes out of my paycheck before I get it. Unfortunately my spouse will no longer be contributing to their retirement in another six months so I'll be unintentionally slowing down my retirement contributions. And I need to think carefully about how this will impact my future, and how I will catch up later.

So there you have it, hope you enjoyed a peak into my very personal, personal finance! I'll keep updating with progress and my goals each month and challenges I'm dealing with as they happen. Would love to hear if you have any feedback on your personal situation or any suggestions for mine.

(Photo from Powi)

What's in your emergency fund?

The conventional wisdom on how much you should have in your emergency fund might be 3 - 6 months of expenses. But what does this mean?

For me personally, I'd only tap my emergency fund in a major event. Something like an unexpected bill wouldn't qualify, as was discussed in a recent post on Get Rich Slowly. I do have more than 3 months of expenses set aside. I calculated a month's worth of expenses by looking at all my fixed expenses (mortgage, utilities, any other debt) first. Then I looked at how much I usually spend on non-fixed expenses (groceries, gas, fun money).

I figure if there was a job loss, is there anything in the fixed expenses I could cancel? Then after that I look at the other expenses. How much could I reasonably cut back there? I try not to assume I'd be capable of making too many major cuts. Better to overestimate my expenses I need to save and then be able to buckle down later. But there's still a point in being reasonable about what you will have to cut if you've actually gotten to the point of tapping your funds.

What do you think? How much is in your emergency fund and would you ever consider tapping it for a bill?

(Photo from Richard Cocks)

Building Blocks of a Roth IRA

Maybe you've been thinking about supplementing your 401k or 403b retirement accounts. Or maybe you're a student or person with relatively low earnings. Or maybe you just want to get started on your retirement. You might be looking at a Roth IRA. Here are some basic facts to get you started.

• You must earn approximately less than $169,000 household income to contribute to a Roth IRA. Or less than $173,000 in 2012 (which starts after April 2011) for married fairly jointly (or less than $122,000 in 2012 if filing single).
• You can contribute $5,000 a year (or $6,000 if you will be over 50 by the end of the year).
• You must earn in the same year at least as much income as you are contributing.
• Contributions are made with earned income (or compensation in general) dollars after tax.
• Qualified distributions are taken without paying taxes.
• Qualified distributions can be made after you turn 59.5 years old, if you become disabled, or up to $10,000 for certain qualifying down payments of a first home.
• If you don't meet any of the above requirements for a qualified distribution, and remove money from the Roth IRA that has been in the account less than 5 years you may have to pay a 10% tax on that withdrawal.
• Exceptions to the 10% penalty tax include paying medical insurance premiums after losing your job, your distribution is less than your qualifying higher education expenses for the year, your you have significant medical debts.
• You can withdraw contributions in the same year you made them. It is treated (tax-wise) as if you never made them.
• Distributions must be taken when you turn 70.5.

Hope these facts helped you learn a little more about the Roth IRA. For the full description and details of a Roth IRA you can check out IRS Publication 590. 

Most major brokerages will let you open a Roth IRA with them. Often you can do everything you need to do over the internet and open the account the same day or within a few days. So if you decide a Roth IRA is the right kind of account for your retirement, I hope you will open one up and start saving! It's never too early or too late.

(Photo from Steven Depelo)

Dieting and Saving Money Are Both Tough

In a lot of ways our finances are mirrored in the way we treat food. Not only do our brains treat money like they treat food (with a resulting dopamine response) but they are both finite resources of which our primary brain and/or rational brain are always trying to get more of.

I think dieting is a lot like trying to save or pay off debt. In both instances, it's probably easier to cut back. Either to consume fewer calories or to cut your spending budget. It's much more difficult to earn extra. It's a lot easier to save 300 calories saying no to that cookie than it is to jog the 3 or more miles it would take to burn off 300 calories.

Similarly, when people are faced with tremendous debt or the need to save for a goal we'd much prefer we could just make the extra money. But earning more income is pretty tough. Sure you can look for a better paying job, ask for a raise, try to start your own business on the side, or maybe even take on a second job. But it's probably a lot easier to save an extra $50 a month by cutting back on certain bills or utilities where you can, or spending less in discretionary areas. It would be a lot more difficult to convince your boss you're worth $50 extra a month. Especially in this economy.

(Photo from Better Than Bacon)

Will a library card save you money?

I've been thinking about doing something I haven't done since probably before I was in high school. I'm considering getting a new library membership. Up until not too many years ago I benefited from high school and university libraries. Then, as a full time employed person, I chose to spend my money on books.

I love books. I just don't see myself ever using an e-reader and I liked the idea of supporting the authors I like. Still, I probably have held back on buying books a few times to save money. In fact, in recent years my book budget has dwindled. Maybe this is because I've already built up a decent home library. Or maybe the commitments in the last couple years have kept me too busy. At any rate, I'm thinking about taking the plunge and becoming a member of my local library.

But, having an interest in saving money I wondered whether this was a cost saving measure? That was actually fairly easy for me to determine. I've been pretty consistent about buying books online for convenience sake so it was pretty easy to estimate. About $10 in 2010 and $30 in 2011. Of course I'm not counting all book-like things (pretty sure comic books will not be available at the library) but still, that's a pretty miserly budget. So will a save a lot? No. But hopefully I'll read more than I would have otherwise and take the risk on something that might not be worth buying. And that's worth it in the end.

(Photo from shutterhacks)

Weekend Reads

Here's just a few brief links to what I'm reading this week and what I've found interesting.

At Classy Career Girl Anna Runyon offers five things you need to know before your first day of work at a new job. Practical tips mixed in with the humility you need to make the right impression and start off on the right foot.

Over at The Daily Muse Neale Godfrey writes in their series for lessons for your younger self to let go of the guilt. She's advising that with all those sacrifices we make when we go for career ambition and let things slip at home and with our families are okay. That it's okay to make those decisions. But we need to leave the guilt behind us.

Lastly at Corporette they ask what makes the perfect planner. They point out waiting until a few weeks into a new year is actually a great time to get discounts on custom planners and offer their own favorites and suggestions.

Feel free to add your own suggestions in the comments!

(Picture via Honou)