Sunday, July 27, 2008

Managing my income

Despite having a spending plan and savings goals, managing my income is a full-time job. Why? Because I am as tempted to spend on items I do not need like any other American, and new priorities shift the targets for my savings goals.

For example, a share of my paycheck is electronically transferred into my general savings account. Unlike other savings goals, this account holds money for emergencies, overages and large home improvement purchases. Because this account has many potential holes in it (e.g., I had a larger vet bill than expected and and ordered two replacement windows), the reserve amount can fluctuate dramatically. While I have a house savings fund, it does not cover purchases that total more than a few hundred dollars at a time. Among window purchases, unexpected bill totals that my spending plan cannot handle and even overspending, my savings account numbers have dropped in half. This is my most immediate liquid savings and necessary for me to have at least $2,000 to handle most money emergencies.

Despite having 20 categories in my spending plan, I still overspend. I have been abusing the prepackaged food lately, pushing hard against the grocery spending allocation. I needed to use money in my eating out category to cover the money I spent on groceries this month (mostly for snack cravings). I cheat myself of little bits of money, but these numbers do add up. Since I live on 41% of my gross income and save 30% (the rest of my income lost to taxes, FSA, health, dental and disability insurance), I do not want to lose the savings cushion I have because I cannot control my food spending or decide "yes, I want that new MacBook Pro and darn the consequences!"

However, having a plan makes it easier for me. I have no debt but my mortgage, which I can comfortably afford. A spending plan ensures I have enough money for the mortgage, utilities, gasoline, insurance and all the necessities (and wants) of modern life. With the numbers staring at me, I know that I only have $4.25 left in my miscellaneous category so I better keep my spending low for the next five days until August's spending plan kicks in. If I keep abusing a category or two, my 30% savings rate plunges.

A spending plan is only the first step. I also have to decide what to do with unexpected money. This may come in the form of bonuses, selling items on craigslist or ebay, or cash rebates. My current plan includes padding my auto savings account, adding small bits to found money account and starting a farm account to save for my future small farm purchase. Saving for a car is my immediate priority so I make regular contributions, but the found money and farm account are only funded occasionally rather than with each paycheck. Deciding where the extra money goes keeps me from spending it and helps me save toward my future goals.

Since I am focused on saving money not just as a cushion, but also for specific goals, it makes it easier for me to weigh potential choices. While I still need to work on the small things, asking myself if I really need another plastic container, I understand that if I want to go to a Caribbean island for vacation, I have to sacrifice at least one of my savings goals and some of the fun in my spending plan. Am I willing to do this? No, I would rather have replacement windows installed in my home than a trip to Jamaica.

Managing my income is something I do every day. It is not just setting up a spending plan or making sure I save a bit each month. It is automating my savings, subtracting the money I spend from my ledger daily, planning for windfalls and keeping my focus on my short-term and long-term goals. The more I stay on track, the more my income works for me and my future rather than me working for income to support a debt-riddled, inflated lifestyle.

Update: Welcome to those readers from the 164th Carnival of Personal Finance: City Slickers Edition! If you liked my post, please explore my blog or subscribe to my RSS feed.


  1. Dear Author,
    Great article, awesome advice! Hope you find my comment with best of your health; I would love to say your article really helped me. Right now I am in a state of affair where I am not able to manage my income so I went for online exploration for getting an elucidation to it. And there I came across your blog. It actually accommodates my situation. So, can you please provide me with some useful guidelines for managing my income and if you don’t mind please forward me excel sheet which you might be using for my further implementation.

    Best Regards,
    Tulasha Shanker

  2. Good points. I really enjoyed reading the article. I want to see myself managing my income in a better way.I hope most of your advise will work for me.