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.

Taxes Are DONE!

Ever since getting married a year and a half ago, doing taxes has always been my husband's job. It's funny since I pretty much handle everything else financially related, but I've pushed this task onto him. I'm not sure why he did them last year, but I conned him into doing them again this year. We used Turbo Tax to file and they let you compare information from previous years if you have the previous year's tax returns on the same computer. I used that excuse to tell my husband that was why he needed to do the taxes. Oh and I checked and it doesn't matter who the primary filer for our economic stimulus rebate is since the last 2 digits of our social security numbers are within 3 digits of each other. But I don't think we'll be getting our rebate on time anyway since we didn't end up filing until yesterday. We did e-file, but I don't think they can process our returns that quickly. Note the link above states that your returns need to be filed and processed by April 15. That's okay.

I think the reason my husband and I procrastinated so much on the taxes this year is because we knew we were going to owe money. Well at least I knew so I didn't push him to do them sooner. I wanted to change our withholdings midyear so we would get less of a tax rebate, but when I went to the IRS withholding calculator, I found out that we were going to owe taxes. Needless to say, I ended up changing the withholding on my paycheck the other way to get less money, but apparently it wasn't enough. The total additional amount we had to pay was about $4K federal and $2K state. I don't know the exact numbers since C did the taxes. I asked C if we had to pay a penalty since we owed so much in taxes, but he said he didn't see any fines on our return.

I surmised that our withholding issue is related to both our paychecks. Our AGI was significantly higher this year than last due to substantial pay increases and C working for the full year. When C first started his job, his withholding might have been off since he made so little in 2006. He only worked for 1/4 of the year and then I made him contribute almost all of his salary to his 403B. Getting married in 2006 ended up reducing my tax liability significantly.

Ok, that's almost it for my post on taxes. One last thing - if there is anyone out there who still needs to do their taxes, H&R Block is now allowing everyone to use Tax Cut Basic and E File for FREE (I don't think this includes state taxes, but let me know if I'm wrong). Since I used Turbo Tax to do my taxes, I don't know much about Tax Cut, but you can't beat the price.

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!

My Husband's Paycheck vs. Mine

My husband, C, took our conversation about adjusting our withholdings to heart and printed a copy of his most recent check for me yesterday. After I took a look at it, I realized that we both get exactly the same salary each paycheck, however, one of us gets paid twice a month and the other gets paid once every two weeks. This means one person makes 8% more than the other.

Now I want to compare his paycheck to mine to examine our deductions and find out how close we are to getting the same "take-home" pay after all of our deductions. I suspect that our tax withholdings will be a large part of any difference in our take home amounts.

C and I are both expecting pay raises fairly soon (September/October). After this next salary adjustment, we will see how the salary dynamic changes. I will probably get a larger increase since I am also expecting a promotion, but we you never know. C and I work in different industries for different types of companies and we're at different points in our career.

My Greatest Financial Desire

Currently, my greatest financial desire is to become a homeowner. Ever since I read The Automatic Millionaire by David Bach, I have wanted to own my own place. At that time the goal seemed unfeasible. I was barely getting by in NYC with plans to move to the other side of the country in less than 2 years.

Since then I have gotten married (I can see why being married typically improves your finances) and we been able to save up a sizable down payment, but maybe not sizable enough for the bay area.

Things I have been thinking about recently:

How much can we adjust our tax witholdings in order to get more of our money back now?
It's harder to figure out the right withholding number when you're married without ready access to your partner's paychecks. I am going to try to get my husband to hand over the most recent copy of his paycheck this weekend so we can adjust our withholdings.

Should my husband and I ratchet down our 401k contributions in order to save more for our future home?
The answer here is probably yes. I am reluctant to not contribute the max to my retirement since I think I may exit the workforce or work part-time once we start a family. I didn't want to ask my husband to contribute less than the maximum while I still contributed the max. I talked with my husband about contributing less to our retirement accounts and he suggested contributing less to his account, while I could still contribute the full amount without me saying anything.

Should I try doing extreme budgeting by The Force?
We already budget by the force. I have my paycheck going into 5 different accounts. However, I allow myself a fairly large "cushion" in my checking account to cover my monthly expenses, allowing myself to never worry about not being able to pay the bills out of my checking account. When I was living in NYC with a much lower income to expense ratio, I had to really watch my spending since there wasn't a lot of money in my checking account. I could change the dynamics of our checking account so that we barely have the money to pay our bills, forcing me to be more mindful of the things I card to my credit card.

Somehow I want to substantially increase our home savings rate.

Yikes! This is silly, sad, and a lesson on why paying taxes is important

I just saw this snippet about a couple who is in a fight to keep their mortgage free home over a $1.67 tax bill.

No, that's not a typo, it's not even $2.