Budget squeezers- how much squeeze?

[jIM_Ohio]

For those people which do not track every penny, how do you know when to stop squeezing a budget?


Here's the details:

1) We just paid a $2600 tax bill by turning off $500/mo IRA payments for 2 months ($2000 total)
2) In last 3 weeks a few stores went out of business and we charged probably another $1000 or so to credit card (summer pool supplies for kids, clothes for kids, non perishable foods, clothes for me). More than likely this added $1000-$1500 to credit card bill. Should be noted the credit card bill is usually around $2000/mo anyways as all gas purchases, food purchases, grocery purchases and similar are on one of two cards we use frequently. So the $2600 and $1000 are on top of the normal $2000 we spend each month.
3) When I asked wife if we had the money to cover a $5000 credit card bill, she said of course and we discussed some of the purchases again to remind ourselves how much we spent.
4) The IRAs were turned off for March and April... I just turned them back on today (for May-December).
5) When I turned IRAs back on, I did a check of 2009 and 2010 IRA contributions
2009 had $4500 go in Jan-Dec and another $500 go in Jan of 2010
2010 had $500 go in.

quick math told me that $4500 divided by 8 months is $562.50. So I set the IRA up to debit $562.50 so by December we are set on maximum IRA contributions by December 31.

6) I told wife this a few hours ago and she said OK
this means we had $125 of wiggle room in budget

7) This means to me I do not put the $125 back into the kitty (I find a way to bank it every month we do not have IRA deposits).


My question is-
how often do some of you go to this well?

If you are not familiar with my household finances, my wife has the only debit card, and she is the one paying the bills month over month. I just take a chunk out of the pay for 401ks, and another chunk out of checking for the IRAs. While I would prefer to handle the bill paying (so I knew this excess existed already) simple things like this (adding more to the deposit) work for me.

Last time I increased the IRAs was in Sept of 2009 (wife's deposit went from about $300/mo to $500/mo). By keeping deposit high two things happen

1) when we need cash, we can stop IRA for a month or two and still max out for year
2) if (when?) the IRA max is raised, I do not have to raid budget as the only thing which changes is the payment 10 months or 11 months or 12 months...

[Joan.of.the.Arch]

We have only once stopped contributions to a 403-b. There was a medical emergency and we suspected our savings + insurance might not be enough. Fortunately, we were wrong, but it made me feel better before we knew for certain.

[creditcardfree]

We have never stopped our retirement contributions to pay for things. I'd dip into my emergency fund first and then pay myself back. If I didn't think I could pay us back, I would stop contributions. We live below our means enough to come up with several thousand dollars in a short period of time.

The way our budget works, is that I know I need $X each payperiod (twice per month) to handle groceries, gas and other miscellaneous expenses. I save each month (thus deduct from the net) for the expected expenses, such as auto insurance, life insurance, ect. I also deduct other fixed expenses, car payment, utilities, mortgage payment, college and retirement contributions. The remainder is extra, fluff, slush (whatever you want to call it). This money is more flexible.

Right now, I use the extra cash to add to our emergency fund and later this year will use it to pay principal on our van loan. If something comes up, I reallocate that money. So, if I had a $2600 tax bill come up I would stop other goals before retirement.

[markusk]

Fortunately, I've never had to stop retirement contribution.

The way we have it set up, we have one checking account through which we pay all our bills, including mortgage, and deposit all our checks. We have about 5-10K in this account that fluctuates daily/weekly depending on when checks are cashed, etc. Anything above 10K is taken out and placed into an online savings account (which is part of our 5 month EF), anything above the 5 months EF amount, we invest (Vanguard California Intermediate Tax Exempt, Vanguard index funds; this is in addition to our retirement account). Once in a while there may be a large purchase -- for example we bought some furniture costing about 7K two year ago, so we moved money from our online EF to checking to cover for that month. As long as we are able to "move" a certain predetermined amount from our EF fund to an investment fund, I don't sweat the details.

Not sure if this is the best way to "manage" our funds, but is headache free and relatively simple.

[disneysteve]

I think the only time I've ever stopped IRA contributions was in 2000 when I was between jobs for 3 months. Other than that, I can't recall any time I stopped contributing in order to cover other spending.

I've posted before that my wife and I don't use a budget for overall spending. I do, however, budget our savings. 50% of my wife's income automatically goes into her 401k. 21% of my gross income each check goes to savings (though I use after-tax dollars to do that). Some of that is automatic, some is done manually. How the remainder of the money gets spent varies somewhat from month to month. As long as the savings money stays on track and all of the bills are getting paid, I really don't care how the rest of the money gets spent.

[jIM_Ohio]

I think the only time I've ever stopped IRA contributions was in 2000 when I was between jobs for 3 months. Other than that, I can't recall any time I stopped contributing in order to cover other spending.

I've posted before that my wife and I don't use a budget for overall spending. I do, however, budget our savings. 50% of my wife's income automatically goes into her 401k. 21% of my gross income each check goes to savings (though I use after-tax dollars to do that). Some of that is automatic, some is done manually. How the remainder of the money gets spent varies somewhat from month to month. As long as the savings money stays on track and all of the bills are getting paid, I really don't care how the rest of the money gets spent.

Here is my take on first half. We owed $2600. Had I liquidated CDs, I would have had to replace them. The IRAs would have maxed in November, then $2000 would have been applied in Dec and Jan (the IRA contributions would be maxed, but the money is still the budget to be saved). To me it made more sense to stop IRAs than to liquidate the CDs, as part of our emergency fund is the fact that our IRAs do not need to be made monthly (we have two months each year where no IRA contribution can be made ($500x10 months=$5000).

So I just shifted the IRA deposits two months... and in process of doing so my choices would have been

a) either Jan and Feb of 2011 are prior year contributions
b) add $62.50 to each deposit for 8 months to make up the balance missing before 2010 ends
c) something else (tap CD) for example or use extra paycheck to catch up as another

Steve- my question is along these lines (I will turn this around to be applicable to you)...

how do you know 50% is enough, and why not 51% to wife's 401k?
how do you know 21% of your gross is enough and why not 22%? When do you stop squeezing?

That is my question.

I found $125/month extra in process of paying off tax bill... at what point do you stop looking for more things to cut and add to savings.

[bjl584]

I over-fund my Roth as well for the same reasons that you pointed out. I won't have to adjust my budget if/when they raise the contribution limits, and having my Roth fully funded in 10 months instead of 12 gives me about 900 dollars of extra wiggle room in my annual budget.

[disneysteve]

Steve- my question is along these lines (I will turn this around to be applicable to you)...

how do you know 50% is enough, and why not 51% to wife's 401k?
how do you know 21% of your gross is enough and why not 22%? When do you stop squeezing?

That is my question.

Gotcha.

The reason we do 50% for my wife is because that is the limit. I wanted to do 100% - seriously. When I filled out the forms, I entered 100% as the contribution rate but they told us 50% was the limit.

As for my 21%, that number has been steadily rising over the years. Way back when, it was 6% of take-home, then 6% of gross. Then 8%, then 10, 12, etc. I increased to 21% last year and will probably up it to 22% as of June 1, 2010. I up it by 1% every 6-12 months when I see what effect the last increase had on our cash flow. Also, I adjusted it as income rose and debts got repaid. When I was still repaying student loans, had a car loan, a HEL and a daughter in braces, not as much was going to savings. As I chipped away at those things, I added the money to the savings.

What is the limit that we can save? I don't know. We haven't hit it yet.

I will tell you that the current 21% is a minimum. We almost always save more than that because whatever surplus remains gets added to savings, so I know that we can afford to maintain our current lifestyle and put away more like 25%.

[jIM_Ohio]

Gotcha.

The reason we do 50% for my wife is because that is the limit. I wanted to do 100% - seriously. When I filled out the forms, I entered 100% as the contribution rate but they told us 50% was the limit.

As for my 21%, that number has been steadily rising over the years. Way back when, it was 6% of take-home, then 6% of gross. Then 8%, then 10, 12, etc. I increased to 21% last year and will probably up it to 22% as of June 1, 2010. I up it by 1% every 6-12 months when I see what effect the last increase had on our cash flow. Also, I adjusted it as income rose and debts got repaid. When I was still repaying student loans, had a car loan, a HEL and a daughter in braces, not as much was going to savings. As I chipped away at those things, I added the money to the savings.

What is the limit that we can save? I don't know. We haven't hit it yet.

I will tell you that the current 21% is a minimum. We almost always save more than that because whatever surplus remains gets added to savings, so I know that we can afford to maintain our current lifestyle and put away more like 25%.

it's weird how well you know someone "online" as I was guessing 50% was wife's contribution limit. It appears you squeeze and have not found a reason to stop... curious if the wife meets that with resistance?

Because this gave me an idea to try every 2-3 years (increase contribution amount, then divert surplus to another account). We don't balance a checkbook, all bills just get paid (on time) and whatever is left gets spent.

[disneysteve]

It appears you squeeze and have not found a reason to stop... curious if the wife meets that with resistance?

I really don't think there has been any resistance because I've always split any additional income. For example, when we finished paying our HEL, which was $218/month, I increased what went to savings by $150/month. That left an extra $68/month in our account for day to day spending. When we made the last payment on DD's braces, $150/month, I increased savings by $100/month and left an extra $50/month free for spending. So bit by bit, we've been able to increase spending at the same time we've increased saving. And as I said, we usually don't spend everything in the "spending" pot and some of it ends up going to savings anyway.

[jason_simpson]

Cutting back or halting retirement payments altogether, savers are putting their long-term financial future at risk.

Cutting retirement contributions is always a false economy and will certainly cost you much more to replenish your funds in the future, than you will save in the short term. My recommendation is always to focus on pensions for the longer term.

[feh]

We've never stopped retirement savings, and we don't really have a budget.

We just live frugally. We spend what we spend and the rest gets saved. We're fortunate in that we don't have to watch things that closely. It helps to not have a mortgage.

[disneysteve]

We spend what we spend and the rest gets saved.

That's basically us but flipped around. Savings comes first. Then we spend what is left. If money or cash flow is tight one month for some reason, we keep on saving but cut back on spending. We never cut back on saving.

[jIM_Ohio]

Cutting back or halting retirement payments altogether, savers are putting their long-term financial future at risk.

Cutting retirement contributions is always a false economy and will certainly cost you much more to replenish your funds in the future, than you will save in the short term. My recommendation is always to focus on pensions for the longer term.

I think you need to actually analyze the system before making such a broad comment....

If the IRA contributions are $500/mo (times 2 IRAs), simple math tells you after 10 months of contributions, the IRAs are maxed... and last time I checked we had 12 months in a year. So the two months of no IRA contributions in 2010 were March and April (and not Nov and Dec). Its part of the plan (if we need money, we can turn the IRAs off). IRAs have been maxed at our house for "years".

[feh]

That's basically us but flipped around. Savings comes first. Then we spend what is left. If money or cash flow is tight one month for some reason, we keep on saving but cut back on spending. We never cut back on saving.

I should clarify. What we do:

- max contribution to 401K
- $10K to IRAs annually
- spend what we spend
- whatever is left goes to EF/taxable investments