Wednesday, June 30, 2010

A Gazillion, or how not to do financial planning

Have you seen the commercial where the two men are carrying around their "numbers" - i.e., the amount of money they need to retire? One has a large, but somewhat reasonable number and the other has the words "A Gazillion." The one with the number asks the other "How do you plan for something like that?" and the response is "I just keep throwing money at it and hope something good happens."

Oh my gosh, I can't tell you how much that resonated with my husband and me.

For a long time, our solution to most of our financial goals, whether we were planning for emergencies, retirement, or the down payment on our house, was to just to throw money at them and see what happened. We had no stopping point, no end goal, and no plan for what to do when we finished - if we even knew we had finished. I had a lump sum of money in a savings account that was to furnish all of our goals (except retirement).

Recently we sat down with a calculator, some paper, and our balance sheets and tried to reconcile all of this. Here's what we came up with.

1. Based on our Good Faith Estimate from our lender, we got a number for how much we would need for a down payment and closing costs, and put that in a separate savings account not to be touched for anything.

2. We made a list of what we need to pay for in the next few months - some basic baby furniture, moving expenses, a lawn mower, etc. - and a price point associated with each of them. I made a subaccount in my savings account for expenses and moved enough money to cover all of these immediate needs. (If we didn't have enough saved to cover them immediately, we would have figured out how long we had until we needed them and allocated a monthly savings amount until we had the money saved to buy it.)

3. We looked at our spending for the past 6 months and figured out what our recurring expenses were - medical bills, car insurance, car maintenance - that came up less than once a month. When a huge payment came up, it was killing our budget for that individual month. By dividing this by how often they occurred, we calculated how much we needed to set aside each month. We made a separate subaccount for each of them and set up a monthly autodraft from our checking account so that we would always have the money available when things came up.

4. We looked at what we had left - both in our savings and in our monthly cash flow and made some decisions. We agreed to put enough in hubby's 401(k) to max out the match, and to put enough into our emergency fund to cover 3 months worth of our expenses. We worked our budget to be sure we could get to that goal fairly quickly, and set up monthly auto transfers to make it brainless. We have some student loan debt we could be paying on instead, but we decided for right now with all the changes and impending expenses that the security was more important to us than the numeric advantage we'd gain. However, now that we have a goal for our savings, we will know when we have achieved it and can then reroute that portion of the budget towards debt reduction.

I'm so much more happy now that we have a clear plan, and having everything on autopilot gives me so much freedom. Maybe we don't have a gazillion just yet, but it turns out that's not what we needed.