Friday, August 15, 2008

Dirty Little Secrets

So theoretically, I'm saving 75% of my income. Every month, I put $2650--after tax--into my Roth IRA and savings account. I decided on this percentage based on Jacob of Early Retirement Extreme's guidelines on how to retire in 5-7 years. And when I talk to people in real life about my early retirement plans, that's the number I throw around.

"I'd like to retire when I'm 35."
"How are you going to manage that?"
"I'm living on about 25% of my income."

Something about that hard number tends to quench any potential naysaying, which is awesome.

The trouble is, it's not quite true.

I am saving my $2650 every month. And that is 75% of my after-tax salary. But my irregular income--gifts, rebates, and, most significantly, freelance income--is disappearing into my checking account and inflating my lifestyle. That's not what I want. I want that freelance income--hard-earned through the work squeezed out of vacations, evenings, and weekends and the time spent reading poorly written and poorly conceived manuscripts--to be padding my savings, not my lifestyle.

This is actually quite easy to solve. All I need to do is deposit all checks I receive into my savings account rather than my checking account. So why don't I?

Because I'm scared. I like having that extra money in my checking account in case I want to buy a new shirt or splurge on entertainment. Putting all my "extra" income into savings would mean that I'm really committing to this early retirement thing. I'd have to start paying attention to the amount of money in my checking account again to make sure I don't pull an overdraft. I'd have to actually live on this theoretical miserly budget I've set up for myself.

That's what I say I want. And I think it is what I want. I spent $119 on opera tickets a few days ago, and I feel foolish. I don't really enjoy seeing opera live all that much. Sure, it's nice to have an excuse to dress up and go to the lovely opera house, but the seats I get are so far away I can't see the singers, and I could essentially have the same experience in my own house, for free, by renting a video of the opera from the library. And when I'm totally honest with myself, I find opera kind of boring. It's one of those thing I want to be familiar with, but don't actually enjoy that much. It is not worth $119 to me.

From this day forward, I will be depositing all "extra" money directly into my savings account. The fear is a chimera. If I ever actually need the money, I can transfer it instantly. And keeping the amount in my checking account to my actual budget, instead of just a kind of "funds on hand" account, will keep me honest.


HIB said...

Interesting post. I know I'm struggling to get a concrete budget. We don't save as much as you do, but we save quite a bit. We save so much that our checking account is slowly dwindling so I am trying to find a balance.

Working Rachel said...

Thanks for stopping by! That balance is elusive, but important...always a work in progress.

mjukr said...

Where are you stashing all that money? Considering the low IRA limits, where are you putting the rest? And why not more pre-tax contributions to 401ks, etc.?

I have goals similar to yours, so am curious. Currently most of my income is pre-tax deferred to 401k/403b accounts (with plans for 72t early access). But with the markets lately sometimes I wonder if I shouldn't just dump it into CDs, T-bonds, or even a MMA.

Love your blog, found it through Jacob's ERE site.