Pocket Lots More Cash in 2012. Plan on it.

In my last article we looked at adding monthly covered call income to cash flows. In this article we’ll look at the other side – cutting expenses and increasing retirement savings without feeling a squeeze. My fictional client is Wendy Wise, a single mom age 50, employed as a full-time pharmacist. Wendy has a problem: She wants to have the freedom to retire in 16 years, but at her current savings rate she will be about $885,000 short of her goal. She considered increasing savings by cutting discretionary living expenses like her health club, clothing and vacation travel, but she feels the quality of her life will suffer if she did.

The financial plan we made for Wendy had some revealing data. Her income with bonuses was $84,040 for 2011. Her tax withholdings were $12,606 federal and $5,042 for state – a total of $17,648 leaving a net income of $66,392. Her net monthly cash flow breakdown is as follows.

Further analysis showed her credit score had slipped to 690 with several billing errors affecting her credit costs negatively. I instructed Wendy to write to all three credit bureaus with supportive documents and demand they correct and update her reports. Within a month she saw her score climb to 782 and her consumer interest rates subsequently drop.

In the next step, I guided her through refinancing her home to a no points 4% – 30 year fixed mortgage. Her monthly payment would now be $1,431. With the extra $642 monthly cash flow she is now able to accelerate her credit card debt payoff schedule to $1,500/M and increase her retirement savings by $342 immediately. When her consumer debt is paid in 10 months and she’ll then shift all those dollars to her 401k and IRA increasing her savings to $1,883 per month. Assuming an average 9% investment return, this may yield close to $846,000 more to her retirement – bringing her within reach of her age 66 retirement goal. But wait, there’s more! Her retirement savings has deferred both current income and taxes. Wendy was able to decrease income tax withholdings by $60 per month for 2012 and $377 monthly for 2013. That’s enough to pay extra toward her mortgage principle, hire someone to cut the grass and save her aching back, or even have a little more fun on vacation. Wendy’s new debt plan has increased her retirement savings and lowered her taxes. These are direct benefits of financial planning without crimping her life style. In fact, her life is better than ever. If we include her tax savings, she now has $2,260 more monthly cash in her pocket. It goes to show you; when you’re good with money, money can be good to you!