The true point of living by a budget

In a recent post, Matt at the blog One Million and Beyond describes the fluid budget. I was glad to see it because the "fluid budget" sounds a bit like the one my wife M and I are on.

We've gotten to the cash register at the grocery store and had to take things off the conveyor belt because we exceeded our spending limit for that trip. But at times we've also shifted money from one category because we suddenly decided to spend more in another category. As Matt points out, a "fluid" budget that has some give can work.

Most people think of a budget like a pair of financial handcuffs, very tight and uncomfortable. But the point of a budget is not to determine ahead of time exactly what you are going to spend in every category of your life and then rigidly spend only that amount. A budget is just a tool to help you control your spending so that you are living within--or even better, below--your means.

When your budget is working, it feels good. You know how much you have to spend, you're making conscious decisions about what dollars go where, and most importantly, you're not piling up debt.

Accomplish those things--whether using a rigid or fluid budget--and you'll take a big step toward reaching your financial goals.

More fun at the Carnival of Personal Finance

I saw Matt's post at this week's Carnival, hosted by Christian Personal Finance. Here are couple more of my (and the editor's) picks from the week's selection:

The whole armor of personal finance. At Debt Free Adventure, Matt draws an analogy between the armor of God described in Ephesians 6:10 and the "armor of personal finance." It's a cool and very appropriate parallel (though I prefer the more plain-English version of the verse, instead of ye olde King James version). After all, every financial decision is a spiritual decision.

Buy on the rumor, sell on the news. Dorian from The Personal Financier gives his take on the link between investing and psychology, my favorite aspect of money. One interesting thing he discusses here: How the expectation of getting money, in our own minds, is actually more satisfying than actually getting it. Go figure!

Move from NJ because of taxes? Were it that easy...

Next Wednesday, April 29, is Tax Freedom Day in New Jersey. That's the day state residents have earned enough money to pay their total tax bill for the year.

Forgive M and me if we don’t celebrate.

Several times in the past, we’ve discussed getting out of New Jersey because of the tax burden—the biggest in the country. According to the Tax Foundation, Garden State taxpayers give an estimated 11.8% of income, $6,610 per person, to state and local governments.

Stiff price for a back yard
For us, high taxes hit home—literally. We’ve been looking for a while to move up from our three-bedroom townhouse to a four-bedroom, single-family house (“with a back yard,” as my 4-year-old son likes to point out). Higher property taxes mean less house that we can comfortably afford.

Obviously, we’re not alone in our frustration. On Tax Day this year, pseudo-“Boston tea parties” were reportedly held in all 50 states, with participants criticizing the federal government’s proposed tax increases and rash of recent spending. Emotions ran high enough that, at some gatherings, the word “secession” was facetiously hinted at.

Our home, for better or worse
M and I would love to “secede” on a more personal level by moving to lower-tax neighbor Pennsylvania (where I commute to and from for two hours each day). But in reality, we’re not going anywhere soon. New Jersey, whether we like it or not, is home.

The first and foremost reason is that we’re surrounded by family. My stepdaughter’s father lives and works within an easy drive of our house. My parents are five minutes away, M’s father and stepmother perhaps 10 minutes. My brother moved in literally down the street, after spending several years in Boston. Life is (most days) better and easier with family close by.

Second, M worked as a teacher for more than a decade in the New Jersey public school system. In a few years, she’ll go back to work and eventually be eligible for a nice state pension (paid for by those state taxes, and as long as it still exists). Since our only other source of retirement security is a 401(k) plan—which has been slammed in the past several months like everyone else’s—that’s a big incentive to stay put.

Accept what you can't control
We’ve talked round and round about other options, such as moving to one of the Pennsylvania towns just across the Delaware River. In the end, though, we always come back to the same conclusion: The best option is where we are.

It’s easy to get worked up over things you can’t control, like high taxes or the direction of the stock market. But after weighing the pros and cons, both financial and non-financial, you may find you’ve already made the right decision. The next step is to accept it, and move on.

My daughter's millionaire dreams aren't far from reality

Our oldest daughter Jessica said she wants to be a millionaire someday. At age 19, she’s off to a good start, and that substantially increases the odds of achieving her goal.

A few weeks ago, Jess took about $1,600 she’d saved from after-school jobs and opened a Roth IRA. With a Roth IRA, Jess can save and invest for her future, such as retirement. The money she puts in will grow without being taxed, just like a traditional IRA or a 401(k) plan. However, unlike those types of retirement savings vehicles, when she starts taking money out of the Roth IRA down the road, her earnings likely will be tax-free.

$100 a month to start
Naturally Jess isn’t thinking as much right now about retiring from her career as starting it. She’s in her second year at Northeastern University in Boston, majoring in journalism and cinema studies. Part of her education includes a semester working full-time at a local newspaper, so she’s been getting a weekly paycheck since January. Her plan is to put at least $100 a month into her Roth account for the foreseeable future, and beyond.

No school debt and lots of time
Jessica’s opportunity to build substantial wealth is enormous thanks to two huge advantages she has. First, she attends Northeastern on a full scholarship. She will graduate in a few years with no school debt whatsoever, which should help to keep her plans to save on track even while pursuing a career field where starting salaries often almost feel like minimum wage.

The second advantage is time. With a savings horizon of 40-plus years, Jess’ sacrifices of trendy clothes, late-night pizzas, and morning ice coffees in these college years could mean financial freedom and security in her retirement years. I’d bet some Baby Boomers today wish they had made the same decisions when they were her age.

It sure adds up
Not that Jess needs any motivation, but I e-mailed her these numbers to show just how wise she really is to start a meaningful saving plan at age 19:

(For simplicity, I based my calculations on a 10% average annual return on the IRA investments.)

• By saving just $100 a month in a Roth IRA, Jess stands an excellent chance of being a millionaire by the time she is 63 years old.


• If she increased her savings to $168 a month, she has a great likelihood of being a millionaire by her 60th birthday.


• If she starts saving the maximum amount allowed for an IRA ($4,000/year in 2007, or $333/month), she could even have her first million by the time she turns 52 (not even “retirement” age).

Granted, $1 million in 2047 won’t get Jessica a retirement that is 100% financially secure. But unlike many kids her age, she already understands the value of saving and sacrifice to reach a long-term financial goal, and that will serve her well.

I couldn’t be prouder.

Woman's good financial sense leads to windfall

Making wise personal finance decisions can be hard because they often require short-term sacrifices for long-term benefits. But they do pay off--and as one California woman found--even quite handsomely.

Hoping to help pay for her oldest daughter's tuition to the University of California, Berkeley, the woman decided to auction off a painting that once belonged to her grandmother, according to an Associated Press report. Instead of the few thousand dollars the woman was expecting the painting to fetch, she was stunned at the picture's final bid: a whopping $620,900.

A possibly difficult choice

Not having the needed funds for her child to attend a terrific school like Berkeley, Mom could have easily required the daughter to load up on student loans. As colleges go, Berkeley is a nice value; in-state undergraduate tuition for 2006-2007 averages only $7,800. Commuting to school from home, the daughter could conceivably graduate in four years with a "reasonable" $70,000 in debt.

But Mom faced head-on what may have been an emotionally difficult choice: Part with a painting that hung on the wall for years in her grandmother's home in Italy? Or strap her child (or the family overall) with a debt-load that might take years and years to pay off?

By choosing to sell the painting, the family can now afford to provide all of their children with higher educations without putting themselves behind the financial eight-ball. Maybe they can even have a more secure retirement.

The wisdom of avoiding debt

To be sure, the woman's experience is rare. The sold painting was unsigned, rumored to be the lost work of 17th-century Italian art master Pier Francesco Mola. Who knows if it is worth the price that the unnamed art dealer paid for it.

I won't be searching my parents' basement anytime soon for family heirlooms that could help pay our kids' college costs. But, like the mother in this story, I will do whatever I can to avoid overloading our family and our children with substantial student loan debt. That approach may not get us a cool $600,000, but I know that it, too, will have its rewards.

Not too early to think of 2007 personal finance goals

2006 is almost in the books. So what are your personal finance goals for 2007?

More than one-third (37%) of American workers said they plan to pay off credit card debt next year, and a third plan to put a set amount of money into savings each month. That's according to latest Principal Financial Well-Being Index, a survey of U.S. working adults at businesses with 10 to 1,000 employees and sponsored by the Principal Financial Group®.

Those are great goals to have. Add to those starting an emergency cash reserve, or increasing your reserve amount to six months of living expenses. Or keeping better track of how you spend your money. Or making sure you and your family have enough life insurance.

For my wife M and me, I'd like to see us get better at setting and living within our monthly cash budget. We did great our first month in October, but weren't as disciplined in November and through this month so far. Next year, I'd like to shoot to stay within our monthly budget for at least six consecutive months.

I also want to finalize our wills. This was a 2006 goal that I set just a few weeks ago , and I made a good start using my company's online estate planning document service. But I ran into a couple snags, so completing it will have to wait a little longer (sorry, M my sweet!).

Two other big objectives: Paying off the last of our student loans and a personal loan we took when we had CJ Jr. If we reach those goals--a good possibility--then we could start up our kids' college savings contributions again and making extra payments on the mortgage--two things we cut back on when we went to one income last June.

Last, but not least: Buying a highly used but reliable van (with cash, of course). This goal is heavily dependent on whether our family size shows signs of increasing in the next couple months, Lord willing.

Yes, I should have plenty of personal finance experiences to blog about in 2007.