My First Savings Plan

I felt like I had to get this out there before I turned 35 because I’d like to be able to say that I started my first savings plan before 35. Sure it might be a matter of days, but it counts!

So this savings plan doesn’t follow the advice of many financial experts, including Suze Orman and Elizabeth Warren (of All Your Worth) in that I’m not building up a $45,000 six-month emergency fund in a savings account before I contribute more toward my retirement (403b). It will take us a LONG time to get to $45,000 and with my job being as secure as it is (and us having some flexibility in times of crises–we could absolutely live with my parents and rent out our home if it got to that), I’m not going to forgo upping my retirement contribution until we hit the magic six-months must-have number (I believe Suze Ormond’s recommendation is actually eight months–there is no way we’re doing that). If you think this is a terrible idea, please let me know.

My tentative plan has two parts:

Part One is to up my retirement contribution from $300 to $600 a month, which means I’ll be seeing (what I’m guessing will be) a $200 reduction in my paycheck. (I also found out that California is upping the monthly STRS contribution by 1.8% which means I won’t even see my first raise–blerg!)

Part Two is to put all of the $5,000 I get withheld in a tax-sheltered 125 childcare account into a savings account at a credit union so that I won’t see it and it will be a pain to move it over.

I believe this will put my annual savings at 18%, which would be amazing. I’m not sure if I’m doing the math right though, so if you could check it for me I’d really appreciate it.

I currently make $4,500 a month after taxes and everything else is taken out (including $300 toward retirement). I’m estimating that once I ask them to take out $600 a month for my 403b my take home pay will look like $4,300 ($100 of that $300 would have been lost to taxes, right?). Part of what is taken out will be $600 a month toward my 403b (basically a teacher’s 410K). Also part of what will be taken out is $454.54 ($5000/11months) that I then reclaim via paperwork from a 125 childcare account. As a teacher I am paid on an 11 month schedule (we don’t work in July so we don’t get paid in July), but I have them withhold part of each month’s check so that I get a paycheck in July. This is why I multiply my salary by 12 but my retirement contribution and childcare account withholdings by 11. Taking all that into consideration, my yearly (gross) income is $63,200:

($4,300 x 12) + ($600 x 11) + ($454.54 x 11) =

$51,600 + $6,600 + $5000 = $63,200

Since both the $6,600 I’d be putting toward retirement and the $5,000 I’d be putting into savings are considered “savings,” the percentage of my yearly income that would be allocated for savings would be $11,600 of the total $63,200 or 18.35%

$11,600 / $63,200 = .183544 = 18.35%

That would be pretty fucking fantastic.

It also won’t be easy. Our childcare is going up $550 a month next year (the childcare my daughter attended, that my son will soon attend, went up $380 a month and my daughter’s after school program will cost $170 a month), so that will be a significant financial change to absorb, along with the loss of $200 a month that will be going toward my retirement. Plus I’ve only been paying my $115 a month life insurance premium for two months, so I’m not really used to budgeting around that either.

Right now I get reimbursed from my 125 account every two months (by choice, I could send in the paper work every month or wait until the end of the year to get it all at once). Sometimes I use that $909 to cover a large VISA bill, sometimes it pays for the homeowners insurance or the car insurance. Sometimes I use it to cover an unexpected home or car repair. At the end of the year it pays for Christmas presents. It is always around when I need to cover something that we hadn’t really budged for. Which means that if I want to put it into savings and not touch it, I DO need to budget for those things. So not only do I need to get used to spending $865 less a month, but I also need to get used to putting even more away for those big bills that come up once or twice a year. (Some quick math suggestions I need to put $200 a month aside to pay the homeowners and auto insurance). So we’re talking about living on approximately $1100 a month less than I’m used to.

That is a really big difference.

I know I don’t need to jump to 18% so quickly (I was only saving 5% before), but the thing is, I think I can. If I watch my spending closely and stick to a budget (I still need to come up with an actual budget), I think I can put that much away. I’m not paying for childcare this summer and I won’t be paying for my son’s childcare in September or most of October either (my inlaws are covering the time before he turns two for us–yes we are incredibly lucky), which means I’ll be saving a significant chunk of change that I can have as a fall back if I can’t stick to this much stricter budget in the first months. I can also access the money in the savings account, it will just require a couple days for the check to clear.

Once we get $45,000 in savings (more on how I want/expect my husband to participate in all this later) we’ll start putting that $5,000 a year (plus more, hopefully) into more high-yield funds and eventually start putting money into 529’s for our children.

I’m going to do more math looking into what I’ll have left to spend on everything after I pay for childcare, pay my parents, pay life insurance premiums and put money aside for annual and bi-annual expenses. I’ll spend these three months before the huge childcare expense for my son comes due practicing staying within that budget so that hopefully I’ll be living within my new means when I actually have to. (And if I’m not, I’ll refine my savings plan accordingly.)

So that is my tentative first savings plan. What are your thoughts?

17 Comments

  1. That sounds very ambitious. If you can do it, that would be awesome! I can’t speak to whether or not it’s logical to put so much into the 403b as opposed to other savings, but good luck!

  2. Good luck! Suze Orman isn’t my favorite.

    I’d recommend seeing if you can figure out where money is going now and what cuts you’ll make before putting a ton of money away to make sure it is feasible. You don’t want to be in a situation where you get into credit card debt, unless you are sure that by hiding the money from yourself you’ll automatically cut your spending enough to make it work.

    In terms of how much savings to put away someplace accessible– it’s a good idea to do a financial fire-drill, not for your jobloss, but for your husband’s if his job is less secure, so you can get an idea of how much you would need saved to get through a spell of unemployment. It sounds like you’ve done some of this already, but it would be good to pin a number down.

    1. I got the $45,000 amount from the must haves that I calculated doing the exercises in All Your Worth (and then multiplying that number by six months). It’s more than we would likely need in an emergency but it’s good to have that to fall back on.

      1. But taking into account the considerations above, like you being unlikely to lose your job and having the ability to move in with inlaws and rent the place out– how much do you need after that? (Including things like moving costs, etc.)

        1. How much do we need if just my husband loses his job? I’m not really sure. I should check it out.

          Even if it would be really hard for me to lose my job, I could always get sick or hurt and be unable to work. I do have disability insurance but it’s not great coverage. So there’s that to take into consideration too…

  3. I’m absolutely no expert but I think you should spend the next several weeks to figure out where you can cut and don’t be afraid to change the plan if you decide it is too ambitious at this point.

  4. I don’t think your math is correct. Shouldn’t % savings be based on gross not net pay? Gross pay = before any deductions–tax ss etc.

    I think it’s a good start but imho your 403 b contribution is pretty modest. Maybe up it a little each year?

    1. In All Your Worth they have you find your savings percentage with your net income, not gross. I’m just following their steps in the book. Maybe that’s wrong though?

    2. Oh, and I agree that what I put into my 403b is modest (about 10% of my net) and I plan on increasing that after I have our “emergency fund” squared away.

  5. Do you have a good idea of how much you spend per month, on average? I tracked my spending all last year, for the first time, and it helped a lot in terms of figuring how much we can save and where we can cut back, etc..

    1. I don’t really. Not yet. I am hoping that the next few months will give me a good idea of what I’m spending. If it’s too tight, I’ll change my savings plan. And if I try this and it’s not working I can also withdraw from the savings account where I’m putting my 125 money.

  6. I think this is a great plan! I am saving so very little and really need to readdress that, b/c right now we will be screwed when we hit retirement age.

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