The following is a staff writer post from MikeS. MikeS is a married father of 2. So, with the cat, he ranks number 5 in the house. He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.
Overall, I have made significant progress on my finances in 2013. I am in a much more secure position now, than when the year began. This is primarily due to large (to me at least) infusions of cash I received during the year. The infusions came in 2 big waves, the first in the March/April time frame and the last coming in December. The first wave was a combination of a performance bonus from work and the second was part of the inheritance I received from my mother’s estate. The second was the remaining amount from the inheritance. In total, they represented almost half of my normal annual salary. Naturally, I was curious to see how it all ended up being allocated.
First up, I eliminated three debts. The first was leftover medical expenses from when my son was born back in 2011. I had hoped that I would be able to pay off the remaining balance in 2013. The improved cash flow allowed me to increase my 401k contributions. The balance had been sitting on a credit card with a promotional 0% interest rate and it was set to expire. I had hoped that my bonus for the year would be large enough to help me retire that debt plus another leftover credit card expense. I had a small balance leftover, again with a 0% interest rate, from buying a new computer in June of 2012. When our old computer had died, I could have paid cash, but I just didn’t want to deplete the emergency fund. With the bonus and inheritance, I was able to eliminate both of them. The last debt, student loans, I eliminate this year came from the second wave. I eliminated this debt mainly for the cash flow purposes. The payments were not particularly onerous, but by eliminating the $138 a month, I was able to budget for other expenses more accurately. Overall, these payments represented just over 1/3 (34%) of the extra money I received this year.
Naturally, I allocated some of the surplus into savings. For this, I just counted the actual dollars that I set aside from the money, not any additional that I was able to save as a result of improved cash flow. The savings went into two different places, liquid (Capital One 360 savings account) and illiquid (Vanguard brokerage account). I consider both to be my emergency fund. I had found early on when I was trying to establish my emergency fund that I would tap into it for non-emergencies. So, I began the brokerage account as a way to ensure that it would only be tapped in a true emergency. I allocated 16% of the extra money to savings. Of that amount, 70% went to the Capital One account and 30% went to the Vanguard account.
Given my son’s condition, I thought it would be a prudent idea, to dedicate savings specifically for any medical bills that might pop up. I know this money will be spent at some point, but at the moment, it acts as a buffer before medical expenses would impact my emergency fund. Also, by having this money, I was able to take advantage of some medical benefits my employer offers. This amount represented about 13% of the overall money.
Yes, I did spend some of the money. Overall, I spent about 37% of the extra. Some of it went to purchases right away, such as a playscape for my kids and a trip over the summer for my wife and me. I also allocated some of the spending money towards future purchases. My wife and I have talked about taking our kids to Disney World in about 5 years. Knowing the trip isn’t something we’d be able to fund from normal cash flow, we started dedicated savings towards it. The rest of the spending went to the dedicated savings categories I have for things like the car, entertainment or the kids. I consider these expense categories and add a little to them every month. I also allocated some money for a couple of “wants” as well. The biggest for me is a new snow blower. Living in the Northeast, it will certainly come in handy.
In the end, I was pleased to see that I allocated about 50% to straight savings and debt repayment. This is a large reason why my net worth has done so well this year. By managing the money effectively, I have increased my ability to save for the future with increased 401k contributions, as well as, an opening HSA. I also was able to responsibly enjoy the extra cash too. BY thinking ahead of time what I would do with the funds, I was able to maximize the benefit from it.