Friday, March 13, 2009

Allocating My Windfall

In light of the fact that I've already conceded that my emergency fund is inadequate to weather this economic crisis, you would think that I'd be putting all of my recent bonus into my EF, right?

Well, I'm a bit embarrassed to report that that won't be the case. When I initially mapped out what I intended to do with my recent windfall, I realized that I wanted to spend 70% on "earmarks" and only "save" 30%.

Before I go on, I'd like to explain what I mean by "earmarks" and "savings". When I report my "savings" in my net worth every month, I don't include money I've earmarked for future spending. After all, if I plan to spend it, it's not really savings, right?

Secondly, in my opinion, debt reduction is the flip-side of the same coin as savings, since it is a guaranteed increase in my net worth. My credit card balance currently has a 0% APR and I'm "reverse arbitraging" my credit card payments (that are in excess of the monthly minimum) into a "high-yield" (*snort*) savings account. Perhaps incongruously, I consider the arbitraged money as "savings" rather than an "earmark" because it's going to be used to pay down debt.

That being said, I struggled last night to split my "earmarks" and my "savings" to a 50-50 compromise. Although some of the "earmark" categories may seem frivolous, please note that I don't intend to spend it right away (or perhaps, even at all). In practice, when I am short of funds, I tap the "earmark" funds before I tap my "emergency fund".

Earmark% of Bonus
Vacation Fund9.31%
Christmas Fund8.27%
Computer Fund8.79%
"Misc." Fund7.24%
Pet Care Fund7.24%
Tax 2008 Fund4.14%
Car Maint. Fund2.07%

  • VACATION FUND: I currently have $0.00 saved in this category. I'd really like to go on an ├╝ber-luxurious trip to Hong Kong-Tokyo for my 40th birthday. And that's not in the too-far distant future (*eek*). This was the one category I had to slash to bring my earmark allocation down. As disappointed I am with that, this will give me a good start.

  • CHRISTMAS FUND: This fund is now fully funded. If I get laid off before the end of the year, I intend to shift this money into my EF. After all, people shouldn't expect me to give gifts while I'm unemployed, right?

  • COMPUTER FUND: I don't have a home computer right now. :-P I've been doing all my computing on my work laptop. I eventually need to get my own home PC, so this falls into more of a "necessity" for me.

  • "MISC." FUND: This is my "mad money" fund that I can spend on my "wants" vs. my needs. The comfort of having "mad money" is critical for my sanity and continued motivation to live a frugal life.

  • PET CARE FUND: Truth be told, this is less about "pet-care" and more about "pet-euthanasia and cremation fund". I just don't want to call it that. Although my cat MJ is doing relatively well right now, I don't expect him to live much longer.

  • TAX 2008 FUND: I owe, I owe. Last year I estimated that I'd probably need about $350 to pay my federal and state taxes. Uhhhh... I was short... by a mile.

  • CASH: I should actually call this my Tax 2009 Fund. As previously reported, my company made the right bet on the housing crisis and the shareholders have been rewarded richly. I participate in my company's ESOP plan and I got a separate bonus there too. But with all good financial news, there's always the tax-man to pay. My company took out the tax on the ESOP bonus from my paycheck. I decided to pay it through my cash-bonus instead.

  • CAR MAINT. FUND: Since my car seems to have a knack for attracting foreign objects that either break the windshield or puncture the tire, I think bolstering this fund would be a good idea.


Category% of Bonus
CC Arbitrage15.52%
CD Ladder 20085.17%
CD Ladder 20095.17%
Roth 20085.17%
Roth 20095.17%

  • CC Arbitrage: Even with 0% APR and paying $1,053/month, I won't have all of my cc paid off before the promotional interest rate expires in October. I need to put away money in order to pay off my CC before the end of the year.

  • EMERGENCY FUND: Yeah, I know I'm only putting away a pathetic 14% of my windfall into my savings. C'est la vie.

  • CD Ladders/Roth IRA: These are critical elements of my long term savings strategy. For now, I'm going to keep them in my liquid savings. If I need to tap this fund while I'm unemployed, so be it. But with respect to my Roth, I'll contribute $50/month from this fund so that I can take advantage of this down-market to dollar cost average.


In the comment section of my prior post, some people asked about a severance package. Other people wondered why, if my company did so well in the housing crash, it's laying off people. I'm not at liberty to specifically discuss these issues right now but there is a logical explanation. With respect to a severance, my company has offered generous severance packages in the past. However, I am not counting on the severance in light of the fact that my company can easily eliminate or grossly reduce it. With respect to why my company is laying off people despite doing so well in the past, well... let's just say my company's philosophy is similar to Warren Buffet's: "The investor of today does not profit from yesterday's growth."


Money Funk said...

Fabulous earmarking. Especially the Vacation Fund. I just started saving 7.9% in my vacation fund. So, I don't think it frivilous at all. Plus, Hong Kong for your 40th... Fantastic! That will be really cool.

"You've done well my young skywalker" ;)

Have a great weekend. I think you accomplished something quite grand with your earmaking and savings. you should be proud.

Sharon Rose said...

Hi there-I think you've done really well to earmark your money this way, it makes things much more organised and everything is taken care of in small doses, well done.

paranoidasteroid said...

Haha, I always struggle with whether I can say I "saved" money if it's for something I know I'll be spending.

I think your plan is OK. Even if you don't consider your earmarks to be saving, they are still there for you to tap if you need to.

Anonymous said...

I think you allocated the funds quite well. I have the same "savings" accounts minus 1 of yours. These funds are essential and are kind of for emergencies too. You just know they will come, just not when.

jpkittie said...

That is fantastic! you have done a great job in thinking this through! fyi - your 'christmas' question - you would be surprised... remember the last 4 months of the year last year when my dh was laid off - family still expected us to do the norm, plus they tried to get us to do more then normal! Some people just dont' get it - I hope your family/friends aren't like ours were!

Good luck :) Have a wonderful weekend!!!

Abigail said...

I think you're right about savings. You obviously thought everything through, which is the important part.

Good for you, and I hope it gets you closer to your goals.