Sunday, April 6, 2008

How I will manage my increased income

No, I do not have a new income stream. I am still clueless when it comes to alternative income, old boy-band records for sale on ebay notwithstanding. Frankly, there is only so much stuff I can sell either locally or on ebay and then what? Today I am discussing the merit increase I will receive starting with my first paycheck this month. In my company, the average increase is ~3% so I was glad my supervisor rewarded me with 4% salary increase. What does a person trying fund her Roth IRA and save money for a new car do? Calculate how much the raise will translate to net income increase and figure out what to do with the money.

Ironically, in doing this calculation, I found an error in how I was calculating my Roth IRA contribution in 2007. When I took 6% of my gross salary and then calculated the net number, I used a percentage that included not only taxes but my 401(k) contribution, fees for disability, medical and dental insurance as well as my F.S.A. I lost just over 1% of my possible contribution to this error. However, I corrected it for the new calculation and it looks like I can contribute ~7.5% of my gross income to my Roth IRA. After calculating taxes, I will contribute just over $3,100 per year. This is a 150% increase over the year before and brings me closer to making the maximum $5,000 contribution for 2008. Since I already have an extra $500 in the account this year and my tax rebate check will give me another $500 to add to the account, my planned Roth contributions are over $4,000. After figuring my 2008 taxes, I will likely have another $500 to add to the fund bringing me close to the maximum. These numbers make me think I can max out my Roth IRA two years in a row, pending no big financial blow up.

Between a share of the money I was contributing to a charity organization through work (I just reached my contribution goal) and my raise, I will be able to contribute an extra $10 every paycheck toward purchasing a new car. This is an important goal for me and every little bit brings me closer to buying a newer car without financing.

According to my calculations, there are still a few dollars left from my raise and they will be added to my prescription/medical copay allocation and my cat care fund. My cats are 14 and 12 so the expenses (visits, food, medication) add up quickly. They are fairly healthy, but I have been dealing with some chronic issues that are not easily resolved and office visits are not cheap.

These plans do not involve lifestyle increases. In fact, my net savings will increase to 34% of my annual income without further changes to my spending plan. This is good news for increasing savings as a percent of my income, but still a ways to go to reach the 40% savings rate at which I would like to be.

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