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New addition (edition?)

February 16th, 2009 at 09:19 am

Well, it's official. We saw the sonogram last week, and we are having another baby! We had a hard time getting pregnant the first time, but this time it only took about 2 months, so we must be getting better at it! Obviously, this is a huge change for our lives in general, but it has specific effects on several areas of our finances:

With an additional exemption and child tax credit, my estimate is that our federal tax bill will go down by $1900, and our state taxes by $250.

In 2008, we were just on the cusp of the 15% federal tax bracket, which is a good place to be. With the additional $3650 exemption, we can now reduce pre-tax 403b savings by $3650 and still be on the cusp of the 15% bracket. We will increase our Roth savings by $3650 to keep the same savings percentage. So some of the tax savings will be reduced by cutting back on the 403b contributions. The rest of the tax savings will go towards our increased expenses.

Day care
My wife works part time, so our daycare needs are reduced already. My mother will be watching the kids once a week. We have a nanny for the other 2 days. We will probably give her a significant raise due to the increased workload. This will increase our daycare costs from around $800 a month to about $1000.

Maternity leave
We were not expecting to get pregnant so quickly, so we will come up a bit short on leave. My wife earns 6.5 hrs every two weeks of general leave (sick, vacation & personal). Right now she has saved up about 84 hrs. If #2 is on time, she will have about 171 hrs by the time she has to take her leave. Her short term disability will cover 6 weeks at 60% pay. The rest comes out of paid leave, and then unpaid leave when she runs out. We are calculating that we will only need to take 2 weeks of unpaid leave, so this is a fairly minor hit to our budget.

We will definitely see some increases in our weekly expenses (diapers, clothing, food). My wife plans to breastfeed again so we won't need formula. Except for the diapers, we are expecting these expenses to increase pretty gradually so we will adjust to them when we notice a big difference in our budget. Probably we will see some cost savings in other places since I think it will be harder to go out.

Overall, the effect on our budget will not be nearly as drastic as when we had our first child. However, I know my sleeping budget is going to see some serious cuts!

ESPlanner Review (Financial Planning Software)

January 30th, 2009 at 06:35 am

I recently purchased ESPlanner from www.esplanner.com. The software is a financial planning package developed by Laurence Kotlikoff, Professor of Economics at Boston University, and Dr. Jagadeesh Gokhale, Senior Fellow at the Cato Institute. Having played around with it for about a week, I figured I would post my initial thoughts.

First, the idea of the software is "consumption smoothing". In other words, the goal of the software is to attempt to generate a level standard of living throughout the user's life. It does this by varying the amount saved or dissaved year-by-year. I think this is a great concept, because it is a more holistic approach, taking into account changes in household size (children being born and moving out), housing costs (buying or selling a home), large one-time purchases (vehicles, vacation homes, etc), and one-time windfalls (inheritances), as well as a host of configurable events, or ongoing or recurring situations. The software creates a detailed plan on how much to save or dissave (spend down savings) each year in order to maintain a smooth living standard per adult. ESPlanner takes into account economies of scale, so a 2-person household can live as cheaply as 1.7 single-person households. Likewise, as household members are added, there are similar economies of scale. It is very computationally intensive and generates a lot of data in spreadsheet form, along with a consolidated PDF summary report.

Now to the negatives. The design of the software is quite spartan. The interface reminds me of freeware, which is not a compliment. I noticed a number of small bugs, none of which made the software unusable but were nagging nonetheless.

For younger people, I would take ESPlanner's recommendations with a grain of salt. The software requires many detailed projections of expenses, income, savings, household changes, etc. Any error in these projections could have a big effect on your plan and could throw off your projections. For older people who are approaching retirement, the variables are fewer and less fuzzy, and the projections are probably more accurate.

2009 Tax planning

December 29th, 2008 at 06:18 am

As the year draws to an end it's time for a little 2009 tax planning. We are not planning any major changes unless we get pregnant with #2. If that happens early in 2009 we'll have to make some substantial changes, but as my dad likes to say, we'll burn that bridge when we get to it.

In 2008, we did a fair amount of jumping around with our retirement contributions, initially starting out very low, then increasing them as the year went on. My goal for 2009 is to keep a more "averaged" path, so we are setting my wife's 403b contributions to approximately 25% of gross. I am again planning to max out my SIMPLE IRA. Since the 2009 max has gone up to $11,500, that equals out to $442 every 2 weeks, or about 14% of my gross. Together it comes out to around 17% of total gross, with everything going in pre-tax. This is about the same as what we did last year on average.

We will probably not max out our Roths this year because the above strategy keeps us very close to the top of the 15% tax bracket. If we wanted to fully fund the Roths we would have to cut back on our pre-tax savings, and those Roth dollars would be taxed at 25% going in. We plan to put about $2K into the Roths this year, which could end up being either college money for our daughter or retirement money, depending on how things go.

Additional extra cash flow will go towards paying down our HELOC so we can keep our 6 month emergency fund in place.

Of course, if #2 will end up being born in 2009, the extra exemption will allow us to contribute less pre-tax and still stay in the 15% bracket, so the Roth contributions would get adjusted upwards. The extra $1K child tax credit wouldn't hurt either.