Friday, August 23, 2013

Fiscal Friday: A Money Order of Preference

CodeMonkey gets paid twice a month; I collect UI every Thursday, and we both freelance. All these taken together mean we can have 15 or more deposits in a single month. Since our income can swing wildly from month to month, I like to have only one financial goal to focus on at a time. After a few years of trial and error, I've settled on a system for managing our income. Whenever new income comes in, I go through the following mental flowchart.

  1. Money goes into the checking account from freelancing, paychecks, unemployment, tax refund, birthday gifts, whatever.
  2. Replenish the checking account balance to $700 for direct debited bills and ATM withdrawals. Is there money left over? If YES, proceed to step 3.
  3. Set aside next month’s rent money. Is there money left over? If YES, proceed to step 4.
  4. Pay off the credit card balance. Is there money left over? If YES, proceed to step 5.
  5. Check savings account balance. Is there six months* of living expenses in there? Add money until there is. Is there money left over? If YES, proceed to step 6.
  6. Check your Roth IRAs. Have they been fully funded for the year? Add money until they have. Is there money left over? If YES, proceed to step 7.
  7. Check books for self employed businesses. How much has your business netted after expenses this year? Do you have all that money set aside to put into your solo 401ks come tax time? Add money until you do. Is there money left over? If YES, proceed to step 8.
  8. Do you have a down payment for an apartment? Add money until you do. Is there money left over? If YES, proceed to step 9.
  9. Treat family to a moderately priced dinner out and invest whatever is left.
Every month my goal is to have the credit card zeroes out and next month's rent set aside by the 15th of the month so that the other half of our income can be saved and invested, though this doesn't always happen. Right now our big goal is step 7, but come the beginning of 2014, we'll be back to funding our IRAs again.
This system has a number of advantages. Because I’m only focusing on one goal at a time, I see progress very quickly. When we were paying off my student loans, it was really empowering to see the balance drop by a couple thousand dollars a month. If I’d been splitting that money toward multiple goals, it wouldn’t have had the same psychological impact.

*I'm really not sold on the six month emergency fund thing, as I've never had an emergency that comes close to that. Right now we have medical insurance plans with $10,000 per person deductibles, but come January 2014, I may take enough out of this fund to meet our 2014 IRA contributions in one go.

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