This Month Our Cash Flow Is Negative

Typically C and I are very good about spending less than we earn every month without a real budget. Not so this month.

1. We paid about $6,500 in taxes. I wasn't expecting it to be that much.
2. We finally bought our plane tickets for our upcoming month-long vacation.
3. And we both maxed out our Roth IRAs for 2007.

Granted the last item is actually a form of savings, but it feels like spending since it's harder to withdraw the money (whenever there are penalty and fees involved, I don't believe in taking the money out).

So with all of the expenses listed above, our checking account is down a lot. Normally we wouldn't even have enough money in our checking account to cover all of those items, but about a month ago, I realized that the interest rate on an ING Checking account with a balance of over $50K was actually higher than the interest rate on the savings account. The rate isn't that different, but when I saw this, I realized that I was potentially missing out on $100-$200 in the course of a year.

C and I have several sub-accounts in ING for our home down payment, emergency savings, vacation savings, and my early retirement contribution. All together, these totaled over $50K so I decided to put it all in the checking account.

Now the thing that is unclear to me is where should all of this spending be coming out of? Obviously, the plane tickets come from our vacation fund. But do taxes come out of our down payment fund or our emergency fund?

I'm not sure putting all of our money together is a good idea since it is hard to control spending and savings goals. I know I could just spend 30 minutes a month working on it, but I must admit. I'm lazy.

Today is the LAST Day to Fund Your IRA for 2007

Today I took the opportunity to fund my Roth IRA for 2007. Why did I wait so long? Well if you saw my earlier post on taxes, you know we just finished them over the weekend. I wanted to make sure C and I didn't exceed the income limit to make the full contribution. Once we had our AGI figured out, I knew that I should fund my Roth ASAP. But I made the mistake of not having enough money in my BofA checking account nor directly with Schwab, where I have my Roth. I had all the money in my ING account and I could have sent a check from it, but I felt more secure transferring the money to my BofA checking account so I could make the deposit in person. I ended up starting these transfers last Thursday. The money was fully transferred into my BofA account today with no holds, so I was free to deposit that check!

Yippee!!

The one lesson I learned here is it's good to not cut things so closely. There were some online transferring options that I wanted to do, but it would have taken too long for the money to clear and become available hence I had to go with the in person option.

Switching from a Regular 401K to a Roth 401K

My company recently began to offer the Roth 401K as an retirement option in addition to the regular 401K. Today was payday for me, so I decided to check to see if all my direct deposits made it safely to my bank accounts (I am somewhat compulsive on certain items and I have my direct deposit going to 5 different accounts). I checked Bank of America, where I keep my ATM withdrawal money (I'm not happy with their interest rates or customer service, but they do have the best coverage in terms of locations and ATMs for those who travel around the U.S.). I was surprised to see that the money hadn't hit yet.

I decided to log online to check out my paychecks. When comparing my most recent paycheck to my last one, I realized that this was the first time my Roth 401K contribution was withdrawn. Then I realized that the Roth 401K contribution seemed a lot larger than my prior month's contribution. So I went and looked at my last paycheck from January and saw that this paycheck's contribution is almost 39% higher. !!! WTF!?!?!?! This resulted in a 21% less money going to my various savings/checking/investment accounts. I thought I had decided to contribute the same percent of my income to the Roth 401K as the regular 401K.

This is going to require further investigation, but it did make me think about one thing - should I just max out my 401K contributions now* and get a much larger paycheck later in the year? At my current rate of contribution, I'll probably max out in 6-8 months, depending on any raises I get this year.

*For some of you out there, this might not be a good idea due to the way certain companies calculate matching contributions. For me, it doesn't matter since the company match is calculated at the end of the program year and it's so small with a somewhat long vesting period that I'm not sure if I'm ever going to keep any of the match. If your company calculates the match on each paycheck's contribution, it makes sense to time out your contributions to get the full match.

Thoughts on the Roth 401K and AMT

Recently my company announced that they would be offering the Roth 401K to all employees. I was very excited about this since I had contacted HR asking if they could make this offering available. At first I thought that there was no question that I should contribute and contribute the max to the Roth 401K. Now here are some things I'm considering. I don't have any of the right answers, so if anyone out there has experience or more information on this topic, I would appreciate it.

1. Contributing to a Roth 401K vs. a regular 401K would reduce my take home pay since the regular 401K is a pre-tax deduction while the Roth 401K is an after tax deduction. I should calculate how much this will reduce my take home pay since C and I are aggressively saving to buy a home.

2. Since a regular 401K is an pre-tax deduction, this reduces our overall AGI (Adjusted Gross Income). Does this have implications on whether or not we will have to pay the AMT (Alternative Minimum Tax)? The AGI is your adjusted gross income which is what your federal taxe are based on. The AMT is a tax that was originally supposed to be levied only on the wealthy, but the salary guidelines were not inflation adjusted, hence it's starting to affect more and more middle class taxpayers (I consider my husband and I upper middle class). Some good links to the AMT are here and here.

I don't know what to do and I have no idea how to figure out if the AMT will affect us in 2008. I guess if we have to pay AMT in 2007, that would be a sign that we may need to pay it in 2008, although I expect our income in 2008 to be $30K-$44K higher (I received several pay raises in 2007, but my overall pay in 2007 was probably $10K-$15K less than my ending annual salary plus I should get another pay raise for my overall 2007 performance and C received a higher than expected salary increase). I don't think we will have to pay AMT this year since we don't have a lot of deductions (I think we donated less to charity than the standard deduction), so I'm hoping we'll be safe!