Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis, and April is “tax month.” I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.
Calvin is in his early 40s, earning a salary of $120,000 plus bonus as an IT project manager in New Jersey. He has just recently finalized a divorce and has a teenage child. Read his bio here. Calvin is on Team Sara, with Certified Financial Planner Sara Stanich.
Last month, Calvin shared his financial update up through February. To get an understanding of Calvin’s financial position, it may be helpful to read his first update, which discussed his progress throughout all of last year.
Below, Calvin reports his financial progress through March 2013. His own analysis is followed by feedback from Sara Stanich, CFP, as well as from Jacob Wade, budgeting expert and founder of iHeartBudgets.
h3>Analysis from Calvin
This past month was a good month for me, and I think I made some good progress towards my goals.
My primary goal right now is to get to a point where my monthly expenses are covered by my monthly salary. I currently have a shortfall of almost $1,000, and I am trying to close that by lowering my expenses. My goal is to have a balanced budget by the end of this year or very early next year.
To that end, this month I was able to switch my car with one that’s cheaper. I had previously bought a 2011 Honda CRV, which is a great vehicle, but is just too expensive for me at this point. I was able to trade it in at a local dealer and buy a 2003 Toyota Corolla with very low miles.
This I estimate will lower my transportation costs by $300 a month, from the car payment as well as from the increased efficiency of the smaller vehicle. I met my target goal of $300 in savings, and I am very pleased with my new vehicle.
In April, I will begin apartment hunting in earnest for my next place to live. My goal again is to save $300 a month. I will also be getting a salary increase in April, and that should add another $160 to my income after taxes. In March I received a bonus which allowed me to catch up on some things and put a small cash cushion in the bank — but I will spend the savings down fairly rapidly between moving and putting a security deposit down on a new place.
I also use that cushion each month to cover the monthly shortfall.
I have a budget question for Sara Stanich: I am now getting paid every two weeks. When I develop my monthly budget, do I base it on two paychecks a month or do I calculate one-twelfth of my annual take-home pay, since two months out of the year will have three checks in it? Obviously the latter results in a much smaller monthly deficit but I am not sure which way is more practical.
This month’s topic is taxes. I am not sure exactly what to say. This year I was pleasantly surprised by getting a tax refund from both my state and federal returns. Since I have an outstanding tax obligation from a prior year, the IRS took it upon itself to apply my 2012 refund to my outstanding tax obligation. I guess I can’t blame them, but I was hoping to use that money in some other way.
This year I should also do pretty good with my taxes because my alimony is tax deductible and also because my divorce agreement says I will be able to claim my daughter as a dependent this year. I am tempted to raise my withholding allowances to put more money in my pocket each month, but I think I will hold off at this point.
My plan for my state taxes refund is to add it to my savings account and use it as needed to cover my monthly shortfall. Next year when I have a balanced budget I would like to be able to use these kinds of windfalls to pay off debt or create an emergency fund.
Feedback from Sara Stanich, CFP
Calvin, you had a really good month! I can tell that you are motivated, taking positive action and making meaningful changes. I think you were initially resistant to making changes with your car and apartment, but you are making it happen. Your net worth increased by $7,700 in one month. Progress feels good.
I am especially pleased that you completed the change in your car. Three hundred ($300) per month is a meaningful improvement. Congrats on your raise and bonus as well.
Your initial target was to close your monthly cash flow gap of $1,000. I see $300 in monthly savings on the car, and you expect another $300 on the apartment. Your recent raise improves the income side of the equation by $160. $300 + $300 + $160 = $760, so I would be looking for another $240 in monthly savings (you may have already found some of this). Does that make sense?
Regarding your budget question, I recommend you calculate one-twelfth of your annual take-home pay and use that. Sure it would be great to live on two checks per month and have “extra” on the months with three paychecks, but you have a cash cushion now and it will be easier to “win” (reach positive cash flow for the month) based on one-twelfth of your annual income. I want you to win!
This month’s theme is taxes. Tax debt sucks, doesn’t it? I agree that you should leave your withholding the way it is. You could use a forced savings program, and a refund next year should wipe out your tax debt for good.
Good luck apartment hunting!
Feedback from Jacob Wade
First, congratulations on bringing your net worth up about $8,000, that is quite an accomplishment! You are making all the right moves to lower your monthly costs so they are more manageable.
As for the budget question, that is my expertise. I suggest budgeting bi-weekly, and the extra paycheck twice a year is just a bonus to throw at your debt. This way you are budgeting for the actual amount coming in because that’s the schedule you are paid on. Ideally, you would save up a cushion and get a month ahead on your budget. That way it wouldn’t matter when you get paid. But don’t worry about that until your expenses are reduced below your earning.
And I know things are really tough at the moment, but once you gain some momentum, I do suggest putting away $1,000 or so in an emergency fund right away. This is critical in keeping your momentum going, and to help curb any unexpected emergencies that could stall your progress. Mental wins are sometimes more important that financial wins, and nothing is more mentally crushing than finally making progress only to have an emergency stop you in your tracks.
All in all, you are making some big decisions, and they will ultimately help get you out of the red. The only other thing I suggest is starting to look at day to day expenses and find some areas where there might be leaks in your spending. Plug those as soon as you identify them, and you could be positive sooner than you think!
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Updated June 22, 2016 and originally published April 24, 2013.