How do you account for big purchases in your budget/cash flow/etc.?

Stacking Pennies recently asked on her blog how she should account in her budget for spending on a new car.   She’s taken out a 0% loan (that she doesn’t need) in order to take advantage of the ability to leverage that money at no risk.  There are also complications involving getting a buyback on her previous car.

She wonders if she should put the 20K in a separate account both physically and mentally as if she hadn’t gotten a loan at all, or if she should incorporate the buyback and payments into her regular budget, and if so, how?

Now, there’s a proper accounting way to answer these questions, using assumptions about depreciating assets and so on, but proper accounting methods aren’t necessarily that helpful in personal finance where we aren’t getting tax breaks on rates of depreciation (meaning you should still do them for rental property or small businesses).

Instead what matters is that you get the information that you need to get a handle on your spending and your savings so that you’re taking care of your future self, saving for things you want to save for, and not penalizing yourself unnecessarily in the now.

There’s no one right way to deal with large lump purchases in your budget.  It’s whatever helps you keep track and make decisions.

I tend to think of things just in terms of my “emergency” fund (really it’s a slush fund since it includes money both for emergencies and for regular lumpy expenses) and how much it is growing or shrinking each month.  Whenever we have to decide on housing expenses like rent or a house purchase I’ll look at the whole fiscal picture and map out what we can afford, but in generally I’m really lazy about keeping track of our money, so just looking at the size of our slush fund each month.  We can do that because in general we spend a lot less than we earn each month.  So in the new car case, the car purchase might deplete our slush fund below levels that I felt comfortable with, meaning more of each month’s excess would need to be diverted to savings, and any monthly car payment would make it more difficult to refill the slush fund.

Another common strategy is instead of having one “emergency/slush” fund is to have specific separate accounts.  So car spending would come out of the “car” fund and anything not accounted for with the car fund would have to come out of the actual “emergency” fund (or luxuries fund or what have you).  Then you’d take into account the inflows and sizes of each of those accounts each month.  This method is similar to my lazy method but allows for more control.  You can better fine-tune your monthly spending and tracking of monthly spending so that you don’t have to have such a big gap between your take-home income and your spending.

How do you account for vehicle purchases (both with and without loans) in your budgeting?

Thoughts on the children’s Xmas haul this year

  • Our brothers and sisters in law spent less on our kids this year than in previous years.  This is a good thing.  Maybe next year we’ll also spend less on them (we spent about $50/kid, mostly on books), but probably not because I love picking out and buying books.
  • We spent Christmas at the in-laws’ this year, which means we opened presents there.  MIL is going to end up spending a ton to send the presents home.  I don’t really know of any way to suggest just letting amazon send the bigger stuff directly to us so she doesn’t have to do that.  But also she probably likes watching everybody open gifts.  And presumably she doesn’t want cousins to feel like they’re being treated differently.  But there are so many gifts that I’m not sure anybody notices.
  • DC1 got a Nintendo DS.  And since DH had mentioned earlier that it was probably too expensive for hir to take to school given the number of times DC1 has lost hir cheap flip-phone (that thankfully nobody wants to steal, so it has been recovered each time thus far), DC1 also got a Kindle Fire.
  • The problem of DC2 getting the same gifts as hir slightly older same-gendered cousin is getting worse.  And we couldn’t just confiscate those gifts either (for the most part) because DC2 saw them at Christmas and MIL is planning on taking them out of the packaging before sending.  Putting on the wish list what DC2 was into in general terms didn’t help much.  Zie got some stuff related to that, but still got lots of stuff zie isn’t interested in that hir cousin likes.  Nor did it help to say explicitly on the amazon list that DC2 wants what DC1 gets (though my mom paid attention to that and got both of them rubix cubes!)  One of the items was so bad that I actually did take it to MIL and tell her we couldn’t accept it– it had crossed a line (I didn’t say it like that though, it was more like could you give this to hir cousin, we don’t really approve of this show).  I know it’s easier to keep things even across grandkids if she’s getting the same stuff for them, but maybe she could match hir up with the opposite-gendered kid who is about the same age instead of the older same-gendered kid?
  • So we’re still struggling with what to do about our in-laws bounty, particularly for DC2.  They still get DC1 really cool stuff even if they’re over-generous (mostly things that hir somewhat younger cousin already owns and loves).  They did get some of the things off the amazon list for the children, but in the end my mom ended up buying most of it just before Christmas.  And that stuff, along with the stuff we got hir, has gotten a lot more playtime out of it.  DC2 just really isn’t into the same things hir same-gender older cousin is into.
  • One thing that did happen that I’m embarrassed about… I was talking to BIL about presents, I can’t remember what about exactly, as we were going up the stairs, but I mentioned that DC2 seemed to get the same stuff as his kid, and he said, “that’s good because they like the same stuff” and I was all, “well, not really, DC2 is really into what DC1 is into.”  At which point we turned the corner and saw my MIL.  So, uh, maybe this will resolve itself?
  • Why can’t the cousin be as into Bubble Guppies (and other gender-neutral stuff) as DC2 is?
  • Sometimes getting the same gendered stuff for both cousins works… DH’s sister got them both a gendered-craft kit that they both loved and spent many hours working on.
  • DC1 may have gotten all the cousins addicted to Batman.

January Mortgage Update and Wells Fargo thinks we’re ready to buy a new home

Last month (December)
Balance:$2,714.41
Years left: 0.25
P =$1,198.91, I =$15.49, Escrow =$812.79

This month (January)
Balance:$1,510.75
Years left: 0.166666667
P =$1,214.40, I =$10.74, Escrow =$812.79

For the past few months our mortgage statement has come with a sheet not about the usual refinancing or home equity line of credit options, but about getting a new mortgage on a new home.  We must have clicked into the “almost done with the mortgage” advertising.

This thought of being ready for a new loan once you’ve finished the old mortgage must be appealing.  With increased incomes over time folks can afford a larger monthly housing payment.  Why go from a small payment to no payment when you could just pay a little more and get a bigger house to go with it?  Many of my colleagues bought much larger homes when they got tenured or promoted, effectively doubling the cost of their housing.

That same thought process can go along with car loans.  Buy a new car after 5 years when your loan is done.  You’re used to the payment, why not get something nicer for about the same cost or only a little more?

We’re a bit odd– most tenured faculty in my department started out with houses under 3K sq feet and now have houses more than 4K sq feet… we have 3K sq ft exactly.  No starter home, no McMansion, just a big house.  While we occasionally think about down-sizing because it means paying less for all the services and upkeep that come with a house, we never think about up-sizing.  Given that we have no need/desire for a larger house than the one we’ve got, it really doesn’t make sense to get a new mortgage.  Maybe there was a benefit to not getting a starter home, even if we ended up paying more for utilities and property tax and so on, because it means we didn’t go crazy with custom-building something even bigger.

We’ve also never gotten used to having a car loan.  Our first car that we owned jointly and paid the insurance on was a graduation/wedding gift/hand-me-down.  We paid for our next car with cash.  We’ve only had a short car loan for the third car that was paid off in well under a year.  So the thought of starting another required monthly payment for a car seems odd.  Going from not paying anything to a regular monthly payment seems painful to us.  But if we’d had a long-term loan, maybe it would seem like business as usual.  Why not get a nicer car for a monthly payment we can afford?

I wonder how much of this buying bigger and better is partly habitual.  You get into the habit of monthly payments, so you don’t think about what you were paying before as a loss, even if you wouldn’t have to pay it anymore if you didn’t buy the shiny new thing.  You compare the additional monthly payment to the niceness of having something new, rather than comparing the full cost of all payments to the increase in niceness over what you already have.

In other words, it feels like the original payment is a sunk cost even if it isn’t because you’re already used to paying it.  We fell prey to this miscalculation ourselves when we bought our house– part of why we didn’t get a starter home was because the mortgage payment for our big house was about the same size as what we had been used to paying in rent for our grad school apartment!

One problem with not having the habit of regular payments is that we’re also in the situation where if we want to buy a new car, we have to come up with 20-30K in a relatively short time-frame to keep up with our usual not having a car payment.  That’s a bit of a spending shock.  Still, it’s one that can be put to rest with a large enough emergency fund and/or a willingness to take on a short temporary loan if it takes time to move around/accumulate assets.  Even if the larger emergency fund isn’t the best use of money, it’s still more efficient in terms of savings than buying a new car every few years would be.

Fortunately one generally doesn’t have to replace a house like one replaces a car (and we’re keeping our home insurance in case of a catastrophic event).  We won’t be buying a new house any time soon.  Even if Wells Fargo wants us to.

How do you think about revolving debt and new purchases?  When do you/have you decide(d) to buy a new house or car?

Ask the Grumpies: How to save for retirement with no earned income?

Steph asks:

Assuming I get my dream post-doc next year, I will be making 2x my grad salary…and none of it will be eligible for retirement savings because it will be a stipend instead of wages. That will be my life for at least 3 years, though hopefully not much more than that. I want to start saving for retirement in earnest – how would you do that in my situation?

This won’t matter too much until 2018, because in 2017 I’ll have earned income as a grad student that will let me max out my Roth, at least.

Grad student finances, by evolvingpf is really the appropriate person for this question.  Here’s her answer from 2012 on her original website.  Her answers are what I first thought as well–

  1. Get married to someone with earned income
  2. Get some earned income (addendum to her recommendations:  if you do any consulting or freelance you can save that in a self-employed plan such as a SIMPLE IRA)
  3. Don’t save for retirement (do other saving money things instead).  Then start saving more than you would otherwise for retirement once you get earned income and a savings vehicle to use.

In graduate school I was married so if at least one of us had earned income for half the year we were ok for IRA/Roth IRA, especially since the contribution limit was much lower at the time ($3K).

In case evolvingpf’s post disappears, good recommendations for non-retirement savings include:

  1.  If you’re in the 15% income bracket (or lower) now is a good time to use taxable stocks, especially dividend heavy ones because of the preferential treatment of capital gains.  Put that money to work for you.  (Note though, it is unclear what will happen to taxes over the next few years.)
  2. Pay off all debt starting with high interest (I bet you’ve already done this)
  3. Bulk up your emergency fund
  4. Save for your next car or a house so you can pay in cash for the car and get beneficial interest rates (and no PMI) for a house

Grumpy Nation– what suggestions do you have for someone without earned income who wants to save?

DH’s second December check was delayed a few days…

DH gets paid 2x a month.  The second check usually sometime between the 19th and the 23rd.  This month on the 21st, DH got an email saying his paycheck would be delayed for a few days waiting on a check from a couple of government agencies.  (Is this a good sign for the future of the company?  Probably not…)  Hopefully by the time this posts it’ll have cashed [update:  it did], but we’ll see.  Both agencies said that “the check is in the mail” and suggest the holidays have slowed transit down.  It’s possible.

I gotta say, I sure am glad that I keep a deep emergency fund and I’d already transferred 2K to checking to cover the late-month expenses.  We’re fine until Jan 6th at which point if he doesn’t get at least one of his paychecks I’ll have to transfer more money from savings.  (My paycheck posts to savings.)

I’m so glad we’ve kept our required expenses down low enough and our savings up high enough that we can handle this.  And that although I’m a little worried about DH being unemployed in April, give or take, we can handle it (and we can handle it partly because I argued for a raise last year and partly because we’re almost done with the principal and interest parts of the mortgage, among other things).  There are times in the past where this state of affairs would be pretty scary, but thankfully now it’s more of a meh, we’ll see what happens.

Also reminds me that I should process some dependent daycare account reimbursements, since that’s one of the ways I used to smooth out cash-flow problems, but I guess that will have to wait until January when school is back in session.

What do you do when a paycheck or reimbursement is slow to come?

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Ask the grumpies: Should I raise my credit card limit?

Nanani asks:

Opinions on the merits of raising the credit limit on one’s credit cards?
I am at the point where both my credit cards (a VISA and an MC, in different currencies; I have lived in multiple countries) have a balance of essentially zero. I use them every month to pay subscriptions and occasional online purchases, but I pay the full balance every month now.

Since I’ve reached the point where I can regularly do that, the credit card companies have been sending me offers to increase my credit limit at a greater frequency.
Right now it’s ~10K (thumb conversion to USD) and I don’t feel the need for more, but I thought I’d ask and see what the prevailing wisdom is.

TL;DR: Raise credit card limit: YES/NO? Why/not?

The conventional wisdom is that if you are bad with credit and need hard limits to keep from over-spending, then do not raise your credit limit.

Otherwise, if you’re the kind of person who ignores credit limits because you’ve never hit one and you have complete control of your spending, raising your credit limit may increase your (US) credit score because it will increase your available credit ratio.  Since credit card companies generally hold liability for fraudulent purchases, this should come at no additional risk.  This will also make the occasional large purchase (that you plan to pay off immediately) a bit easier because you won’t have to break it up across cards and you’ll be able to get the benefit from rewards.  Note:  all of these answers are US based– we don’t know how credit card companies work in other countries.  (And, as always, do your own research and/or talk with actual professionals before making any major money decisions.  We are not actual professionals.)

Grumpy Nation:  What do you do when the credit card company wants to raise your limits?

When do you open presents?

When I was a kid, after much negotiation with our parents, we were allowed to open one present on Christmas Eve and the rest of our presents on Christmas day.

As an adult, I don’t have to wait.  I open them as they come.  In fact, I used this amazing three tier rack which was this year’s Christmas present to me from my MIL to hold rolls, cornbread, and zucchini bread at Thanksgiving this year because she does her Christmas shopping early.  Similarly, I told DH I wanted a better reading lamp situation and he got me this amazing floor lamp that does everything I wanted and doesn’t even require a hole in the wall or a headboard for the bed (my favorite part:  the way the light switch lights up when I fumble for it in the dark).  I have been appreciating it for weeks now.  I have also been enjoying downloading my shiny new kindle book presents as they come– I will read them through our holiday travel.

#2 is different– she likes surprises and opens everything on Christmas morning.  I know this because she always thanks me via IM on Christmas.  (See also:  her birthday.)

Of course, what one does as an adult doesn’t necessarily translate into what one forces on one’s children.  Part of the magic of being an adult is that you no longer have to do what your parents tell you to do, but before then you mostly have to.  So that means since the kids have gotten old enough to understand Christmas, we’ve generally been saving their Christmas presents for them to open on Christmas morning.  Given our in-laws’ generosity, this can get overwhelming.

This year we’ve got complicated travel plans.  On the 23rd, we’re taking the kids to the city where they will stay at my sister’s with my parents.  Then we will join them on the 24th.  Then on the 25th, we’re getting on a plane to visit DH’s family.  I asked my mom if she wanted to see the kids open their presents from her (she’s already sent them via the magic of Amazon) or if we should open them before heading into the city.  She said whatever was easiest, noting that we shouldn’t have to drive presents all over the place or leave them at my sister’s.  So we’ll be doing some of the unwrapping on the 23rd.  DC1 will be able to pick out which new books to take with hir while traveling, something that will make life easier for everyone.  Then there will be more presents on the 25th since my in-laws have decided to ship the kids’ presents to their place rather than ours (which itself brings the logistical hassle of getting stuff back home).

This past Saturday I let DC1 open the present from my mom that I knew was a Rubix Cube because zie had gotten so good at the computer version that I thought maybe it was time for a real one.  Zie has been spending every non-chore moment this weekend messing up and solving and messing up and solving again.  (In fact, it’s likely that the ~$10 Rubix cube would crowd out time spent on the ~$250 handheld Nintendo thing that my MIL is getting hir if zie opened them the same day!)

On the one hand, I feel like spreading things out allows each gift to be appreciated and to give me maximal pleasure.  On the other hand, it does take away a little bit of the magic of Christmas.  But we do always do the stockings (full of candy!) on Christmas even if some of the other presents get pushed earlier.  And maybe the magic of Christmas should be less about gifts and more about family, I dunno.

And of course, poor DC1 gets showered with even more presents just a few days later given hir holiday birthday.  This year we’re traveling on hir birthday so we’ll probably celebrate with cake the day before with the in-laws and maybe with my sister on the day.  We’ll see.  We will leave hir birthday presents from us* and from my parents to be unwrapped when we conclude our travels.

*My sister claims this violin tuner is really a gift to ourselves…she’s not wrong.

When do you open gifts– as soon as you get them, or do you wait until the celebrated event (be it a religious holiday or your birthday)?  Has it changed as you’ve gotten older?  If applicable, do you enforce the same rules on your children?