Life Sense - Planning & Budgeting

Life Sense Wisdom #1

Be aware of your financial, career, and home life with a bias for action. Being aware is having or showing realization, perception, or knowledge. Active learning is the fuel for your awareness. Build the discipline to give yourself the free space to learn, challenge and seek guidance.?As a young IT systems analyst, I was, in my mind, promoted too quickly to a management role. I was worried that I lacked enough leadership skills to succeed. During this crisis of confidence, I learned an important lesson about learning. When you hit a ceiling, you have a few choices. You can run away from the pain, move sideways to procrastinate, not address what is in front of you, or plow ahead. Taking the latter path, you will make mistakes, fail, and may even get fired. Push yourself to remain engaged. ?At times you will be truly humbled. But then you have that ah-ha moment. A breakthrough, you unconsciously start connecting the dots, seeing things with greater clarity and new insights on execution. At the end of this beautiful cycle, your field of vision grows in higher definition, and a new realization hits on how much more you do not know. The good thing is that you are aware. Forewarned, as the saying goes, is forearmed.?

?Financial Awareness – Planning & Budgeting

This segment, Planning & Budgeting, is a process to help you learn and connect your financial dots. We built our personal spending analysis in the first installment of Financial Awareness. See https://www.dhirubhai.net/build-relation/newsletter-follow?entityUrn=7032507322916601857

After posting the article, I needed to complete my spending analysis to prepare for taxes. Completing the categorization and data entry of transactions from your bank, credit card, and e-payment statements is a simple repetitive process for the remaining months. It took me a few long sessions to clear a ten-month backlog of data. I should have mentioned that starting in January is best and diligently repeating each month’s cycle. Note to the author, listen to your advice. ?Having regained ground on my personal progress made good (PMG), I am ready to navigate to the next financial awareness waypoint.

While painful, my spending insights were illuminating. Entering the data forced me to relive the past year objectively. It amplified what a busy year we had. Our youngest son’s wedding, capital improvements to our home, and a two-month road trip for my wife and me to kick off retirement (See https://www.dhirubhai.net/posts/charlesgschwab_wrote-this-last-week-before-the-employment-activity-7027786682246524929-W47K?utm_source=share&utm_medium=member_desktop) .

?If I had not categorized the data to isolate these one-time spends, I might have felt ill seeing the total spend for the year. Parsing spending into one-time versus run rate categories allows me to evaluate the efficacy of my prior planning and budgeting and adjust to the prevailing winds. ?

The next step is to compare year-over-year results using the run rate categories created in the prior year’s spending analysis. My major categories for run rate include:

Cars Cash Cell Phones Clothes Credit Card

Fees Donations Education?? Food Gifts

Golf? ???? Grooming???? Healthcare Ins Home-Financial??

Household Maint.?? Life Insurance????Miscellaneous

Restaurants ??????????? ?Subscriptions? Tax Preparation ??????????????

Travel Utilities?????????Wealth Management Fees

One-time spending categories include:

Capital Expend. ????Wedding???????? Travel (unbudgeted)

My spending insights.

?

• The high inflation rate in 2022 explained some line-item increases like food, restaurants, and gas. I used a 3% inflation factor.

Action: For the 2023 budget, Increase the inflation factor to 5-6%.

• Maintenance costs for my wife’s ten-year-old SUV are starting to escalate.

Action: Look at purchasing a new SUV with a good maintenance contract.

Determine funding strategy.

• I still have a few subscriptions that I do not actively use.

Action: Close them out.

• My wife comes off Cobra onto Medicare on 6/1.

Action: Adjust the budget accordingly.

• My life insurance policy has generated enough cash to pay for itself.

Action: Increase cash flow. Request in-force illustration for policy. Stop auto-

payments.

• My 2.85% mortgage is fixed for seven years and reverts to an ARM in late 2024.?

Action: Budget to begin drawing from equity accounts and hold in 5%+ T-bills

to fund payoff.

A review of 2022 spending is complete. Action items for the 2023 budget were identified. I now need to update my 2023 Investments and Cash Flow Projection spreadsheet. Please take a look below for the pdf template. I'm sorry, you must increase the image size to read it.

The spreadsheet has two sections.?On the left is a breakdown by major category of my run rate budget for 2023. On the right are the Taxable and Tax-Deferred Investments, Sources of Funds, Total Funds, Total Annual Spend, Capital Expenditures, and Surplus/Deficit Spend. Add a line for the loan payments if you tap into your home equity. I purposely do not include real estate equity.

The first number I update is Total Annual Spend. I calculate this number by grossing up my Annual Run Rate to account for estimated federal and state taxes. Your sources of income will depend on your job, age, tax implications, and financial circumstance. Here is an easy trick to create a placeholder. Google ‘how much in federal and state taxes do I pay if I make $xxx,xxx and live in ‘your state of domicile.’ With this target, I adjust my sources of income to drive my surplus/deficit spending to zero. ?Review your funding plans with your financial advisor and accountant for greater precision to adjust for capital gains/losses capture, taxable dividends, and ordinary income. This is not an exhaustive list.

Next, update your investments and Sources of Funds. Pre-retirement is the wealth accumulation phase of life. Sources of income will predominantly be your wages (W2 or 1099). Include your spouse’s or your partner’s wages if you share expenses. Taxable investment accounts are another available source you may tap. If you are fortunate, you may have a trust fund. If you have an inherited IRA from a deceased relative, it will require mandatory distributions over your remaining actuarial life or ten years, depending upon when you inherited it.

Life Sense Wisdom #2. It is hard to think thirty years out when you are young and starting to accumulate savings.?Time is indeed on your side, and so is the positive effect of compounding earnings. Maximize pre-tax investments, such as an employer’s 401k, to take advantage of matching contributions. Teachers should contribute to 403(b) plans. If your employer provides a Health Spending Account (HSA), consider contributing to leveraging pretax earnings. ?Over thirty-plus years of invested contributions can become a tidy nest egg. Roth IRAs are an excellent after-tax savings investment to grow tax-free and enable tax-free distributions. Again, talk with an advisor. If you do not have one, sites like Smart Asset or LPL Financial assist in locating an advisor near you. ?Do not overlook word-of-mouth from trusted friends and family. Shop, it is your money.

Public Service Announcement. Before filling out forms to maximize your contributions to retirement savings plans, you must assess your spending run rate against your income. Do you know your current fixed costs? Have you anticipated a buffer for the unexpected? Housing, food, taxes, healthcare, kids’ clothing, schooling, and car payments cannot be wished away. ?Know the exact impact of pre-tax contributions on your net pay. This will make you less likely to borrow against retirement plans and pay penalties.?It will also mitigate stress.

For those entering retirement, it is time to shift from wealth accumulation to asset distribution. Your source of funds moves with you from wages to retirement plans. ?Social Security Benefits will likely be available if you are sixty-two years or older. It is considered prudent to wait until you achieve your full retirement age or delay until you turn seventy to maximize benefits.?Go to www.ssa.gov to learn your benefits and the future value of the retirement benefit at various ages. While rare nowadays, you may have a pension to draw on, usually at age sixty-five. The bottom line is to do your homework and seek advice from a professional advisor.

For planning purposes, I assume my taxable investments will grow by 5.5%, and my tax-deferred investments will increase by 6% yearly. Historical data support slightly higher returns, but I prefer to be pleasantly surprised. I expect only a 1% growth in cash balances. With an increasing Fed Funds rate this past year, short-term returns have reached 5%. Take advantage of the higher returns if cash is not needed to pay bills immediately. Again, I seek to take the long view for retirement planning while being tactically opportunistic. ?I have incorporated a 3% annual inflation rate for all spending and a 2% COLA for social security benefits. Use the numbers that make sense to your risk tolerance, experience, and knowledge.

Life Sense Wisdom #3. ?Life will throw you curve balls along the way. Unexpected spending will happen, and some can be large. Anyone with children or have faced a severe illness can attest to it. Incorporate those surprises when realized into your plans. It is best to anticipate which funding levers you want to pull well in advance. I have a line item, Capital Expenditures (non-recurring), to capture big-ticket items like home improvements and cars.

Data entered, and you are now ready to play the what-if game. You can mess with funding sources to see the long-term impact of your decisions on your investments. My plan duration goes until I am a hundred years old, as if. To keep my plan real, without some complex Black Scholes modeling, I threw in some market bombs every several years—down years, where I lose 5% of all my assets. Sadly, dealing with the past year and current market performance was insufficient. At the start of each new year, to recalibrate, I use actual balances to reset my positions.

I have included a section below defining the calculations for each line item. LinkedIn, for security reasons, does not allow spreadsheets to be uploaded.

Do the work early and consistently. You will sleep better knowing you have done your job to care for yourself so you can care for those you love.

I am ready to automate, but only if a product makes my life easier. I have sought out a few commercial products to evaluate.?More to come on my findings.

Safe sailing, Captains!

Charlie