“To every problem, there is a most simple solution.”
― Agatha Christie,
[ Day 39 of 2000 ]
Our salaries have been going up every year. I even changed my job in between – that resulted me in getting an increase in salary, and some joining bonus. They spread it out over a few years, which means I keep getting it in multiple smaller chunks. BusyDad’s employer pays them bonuses four times a year. Altogether, in 2017, we have had at least 8 paychecks which was more than the routine, and two salary increases (one for each of us). That is just 2017. If you look at the last four years that we have been saving, I am sure our pays varied a lot.
Through all of this, our spending has remained the same. I am not saying that it doesn’t vary from month to month – Some months are really expensive. Like summer for instance. I was looking at the child care expenses to claim what is tied up in our FSA, and realized that this year, we spent close to 2700 dollars on summer camps alone. And this is after we took a two plus week break to travel cross country. In my defense, both of us work full time, we need the child care.
Our spending annually has remained the same. We spend around $35,000 – not including health insurance premiums, car insurance and the huge one – property taxes.
We weren’t trying hard to save money – It was on the back burner, not it is like now. We weren’t doing anything specifically to avoid lifestyle inflation, or we thought. One decision, made a while back, kept us on track. It was not a conscious decision, it just happened to be made. Looking back, I can now see how that helped us stay on track.
Time for the drum roll…
We allocate a fixed amount of money for our expenses. And that doesn’t change with salary hikes or bonuses or one time expenses. Let me explain.
Both of our employers let us do a direct transfer to our bank accounts, and we can transfer it to more than one account. We do a direct deposit (fixed amount) to our bank account that we use for our expenses. We also do a direct deposit (again, fixed amount) to our Vanguard account. Anything that is left over, goes to our credit union account which is linked to our mortgage account. This simple distribution makes sure that any out-of-the-routine payments go directly towards our mortgage.
Of course you have to be careful in picking the amounts that need to go to each account. But these decisions need to be made once. You can try living with it for a while, and revise it later if you need to. We also keep our emergency funds in the same bank, so I can borrow from it when I really need to – I do not keep credit card balances even if that means dipping into our emergency fund. I don’t know if that is the right decision, but it has worked out for us so far. Our salaries come on different cycles, so we have at least one pay coming in most weeks. The surplus amount that goes into the credit union is not actually paid towards the mortgage until the first of the next month, so we can actually transfer it back to our bank account if it is really needed – We haven’t had to, so far.
There are some months when we spend less than what is actually contributed into the bank account we use for spending. And some months when it is not close enough. I keep a savings account in the same bank. I normally pay off all the credit cards around the 20th of each month. And I keep around $1000 in my checking account because I issue checks out of it. Once I pay off the credit cards, I actually subtract $1000 from what is there, and transfer what is left to the savings account. When I am short on money, I dip into that savings account first. If the amount in that savings account ever goes over $3000, we transfer $2500 to the credit union, to pay towards the mortgage.
Sometime during the year, I try and make sure that we both contribute the maximum amount to the 401(K) account. It has to be spread out through all paychecks because we don’t want to miss the employer match by contributing too much earlier in the year. I check again towards the end of the year to make sure that we will indeed hit the maximum limit.
Our system seems to be working pretty well. Even though our pays have gone up so much, our net spending hasn’t. Because I have to fit into whatever I have allocated monthly. I usually have to touch the savings account only when it is time for paying for the summer camps. And when I am traveling for work. My office reimburses all expenses, but the way I have set everything up, any reimbursement goes towards the mortgage (because it is just added to the regular pay). I have had to tap into our emergency fund a couple of times when this happened. Once I made sure that it stayed in the checking account at the credit union, and didn’t get paid towards the mortgage. Once I forgot, and lived through the next few paychecks worrying about an emergency – Will not repeat that again 🙂
So yes, this method has issues. You have to set it up. And we have gone through a few weeks of not having money even after earning enough and spending less. But everything is automated; The net effect is that our mortgage payments are much more than what is required. We also systematically invest in index funds. Win-Win everywhere!
Do you think this will work for you? Can you think of why this will not work for you? May be I can help – After all, I have had 4 years of experience with this set up. Let me know!