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I am SO excited about today’s budget Friday submission. Here are the details:
Crystal is a fellow personal finance blogger who has more energy than anyone I have ever (digitally) met. She has also been talented enough to build an online business strong enough to quit her job, and have her husband quit as well. They both work full-time, providing wonderful advertising services to fellow bloggers, and building valuable, entertaining websites. Since their income is wildly variable from month-to-month (see below), we are going to approach this budget a little differently.
Emergency Savings – $25,000
Other Cash in Banks – $50,000 (Using for 20% down payment on new house in September)
Crystal’s 401k from Past Job – $27,000
Crystal’s Roth IRA – $29,500
Hubby’s Roth IRA – $8850 (started last year)
Stocks/Cash for Stocks – $22,000
Current House – $120,000
Current House – $24,500
Any extra money is usually split between the emergency fund, cash for investments and home payoff, and fun money/vacation accounts.
This whole budget will be changed by their new home at the end of September:
+ about $2000-$2500 in monthly expenses (mortgage, property taxes, higher bills)
+ $1200 in monthly income for rental house (already have tenant lined up)
– $50,000 for closing costs on house
+ $209,000 mortgage
+ $260,000 house asset
1. Pay off current mortgage by the end of 2013.
2. Pay off new mortgage by the end of 2022.
3. Continue fully funding both Roth IRA’s every year ($10,000 a year).
1. Time with friends and family.
2. Financial freedom.
Here’s what Crystal says, “Given those priorities, we outsource what we’d really rather not spend time on but save quite a bit for investments and mortgage payoff. I’d rather not look back in 30-50 years and be full of regrets. That is why we spend as much of our free time as possible doing what we like. It is also why we’ve been saving for retirement since we graduated from college in 2005.”
Here’s their budget submission:
YIPPEEEE! Wasn’t that a blast? Man, I love budgets, don’t you?!
Crystal has done what many of us wish we could do. She started her own dream business, doing what she loves and making a living off it. She is her own boss, she gets to work from home (or wherever there’s WiFi, really) and provides an amazing service to her fellow bloggers. Yes, she is making great money, but when her income can vary from month-to-month, we want to be as cautious as possible when putting together a budget plan. Dave Ramsey calls this a “hills and valleys” budget, some may call it a roller coaster, but the idea is that they have peaks in income (hers happened to be $23,000) and valleys (hers happens to be around $8,000). When planning a budget this way, it’s best to take the lowest possible number and base your entire month around that income. So their minimum budgeted income is $8,000 a month (+$1,200 with new rental), but their average monthly income is around $10,000.
At $10,000 a month on average, they are well below the limits of the Roth IRA income phaseout. But if they keep rocking it this hard, they are bound to make more money, in which case they will need to b aware of the Roth IRA income phaseout amounts. For a 2012 Married Filing Joint tax return, the Roth IRA limit is $5,000 if their earned income is under $173,000. If they make more than that, their contribution is reduced by 10% for every $1,000 more earned. So if they absolutely kick blogging butt and make $178,000, they can only contribute $2,500 per Roth IRA account. If they make $183,001, they cannot contribute to the Roth IRA at all, and would need to invest their money elsewhere (I would suggest opening a SEP, which is like a 401k for self-employed folk). Just something to think about for future planning.
I do suggest moving to a model where they are one month ahead. Currently, they transfer money into their checking account every two weeks, as they are used to the bi-weekly paycheck model. Paying themselves bi-weekly only delays their investment/savings accounts from receiving interest or growing. Since they always have the money at least one month in advance, they can just pay themselves $7900 by the first of the month and tackle their bills at the beginning. It really does make a difference in how easy it is to look at the big picture and whole month before it begins. They can also call their monthly billed services and have them bill at the beginning of each month (I recommend the 5th) so they can have all of their bills paid within the first week. This makes the rest of the month MUCH LESS STRESSFUL and all the money left is usable for more saving, investing or having some fun 🙂
Here’s the payoff schedule:
- Mortgage #1 – $24,500.00 (gone by November 2013)
- Mortgage #2 – $209,000.00 (gone by January 2021)
- Financial Freedom!!!!
As usual, I suggest using the snowball method to paying down debt. Since their only debt is two mortgages, once they pay of the first one they can use that extra money to put toward the second mortgage. Their snowball would be about $1,795 per month after the first mortgage is gone. Based on some estimates with a mortgage calculator, they would pay off their mortgage in 7 years, 2 months! THEY WOULD SAVE OVER $136,000 IN INTEREST!!! How awesome is that?! And that’s if they only make their minimum income. I can see this happening much faster, and am excited to watch their progress!
One thing I did not address was where any extra income should go. Crystal already had a method of splitting extra income evenly toward tax savings (which I built into the spreadsheet to auto adjust as income goes up), investments and fun money! I honestly love that plan, but would add a 4th category, and that’s mortgage payoff. But I would do it this way. For every $1,000 extra they make a month, put the first $250 toward taxes (Uncle Sam always gets first dibs), the next $250 toward investments, the next $250 toward fun money, and the next $250 toward the mortgage. That means, if they only make $500 over, its taxes and investments. I suggest doing it this way because they are already on track to annihilate both mortgage at breakneck speed, but they really should be putting at least 15% into retirement. And since friends, family and free time are their priorities; I put fun money before extra mortgage payments.
I am truly impressed with how their current budget stands, and the fact that they will own two houses outright in the next 9 years! Owning two houses at their age is truly outstanding, and they are not only setting up themselves for life, but any future generations that may come. Well done, Crystal! Now, we’re waiting for you to blow my measly budget out of the water and kill these mortgages faster than Steven Tyler left American Idol!
Comments: What do you think?! Are there any small business owners out there (besides Crystal, obviously) who have any insights on creating a budget for your business? Is there anything I’m missing here? I am up at 12:30am on a weeknight to finish this budget, but I seriously love me some spreadsheets! Does that mean I’m crazy…? Or just passionate?
Speaking of Steven Tyler…
I took this photo from the front row at the Aerosmith concert a few weeks back. I guess all I can say is that if you want to achieve your budget goals, you need to “Dream on, dream until your dreams come true!” 🙂