Putting real money into Cruz family budget

All that stuff about budgets can be frightfully boring. But it's also terribly important.

So, to make it interesting (and personal), I'll let you peek into my financial life. I'll tell you how my wife, Georgina, and I estimate our income and expenses, and how we figure out how much (if anything) we can afford to save while working only part time. In the process, I'll pass along a tip for substantial tax savings.


We start by adding up the essential or "non-discretionary" expenses - the groceries, the electric bill, water and sewer, and so forth (our house is paid for, so there is no mortgage). There are homeowner insurance premiums and property taxes to pay, however, and homeowners' association dues. And being under 65 (not eligible for Medicare) and self-employed, we are saddled with hefty health insurance costs, with a (gulp!) $916.60 monthly premium for family coverage in 2006, up from $708 in 2005.

The best way to project future expenses, of course, is to use the actual numbers, if known, or base them on past experience.


Our long-standing habit of tracking expenses makes our budgeting easier (for example, we know we spent $1,389 on electricity and $4,703 on groceries in 2005). With the use of financial software such as Quicken or Microsoft Money, this expense tracking is a snap.

Nowhere has the impact of inflation been as dramatic as in health insurance, where premiums were a "mere" $363 a month in 2000, and in windstorm insurance, where the premium for our beach home in Vero Beach, Fla., skyrocketed from $1,201 in 2004 to $2,521 in 2005. For 2006, we expect a double-digit percentage increase.

But enough depressing news. After factoring in all our necessary expenses, adding another 5 percent for emergencies and also including amounts for "fun" things, such as hobbies and travel, we estimate we'll spend about $60,000 after income taxes in 2006.

Next question: Will our work and pension income be enough to cover this amount, or will we need to start withdrawing from our IRAs and other retirement accounts for living expenses?

My pension income is $1,097.83 a month until both Georgina and I die. Work income from our freelance writing, which can fluctuate erratically, is harder to calculate (if you collect a regular paycheck it should be easier).

Based on experience, we can reasonably hope for a combined income of $60,000 from our writing in 2006. Added to the pension, that gives us a total of $73,174 for a year, before taxes. Is that enough to cover $60,000 worth of expenses?

Normally, it wouldn't be. Being self-employed, we pay a 15.3 percent self-employment tax for Social Security and Medicare on our net income from work.

Add federal income taxes and a combined work-pension income of $73,174 would result in nearly $14,000 in taxes for us in 2006 if we take the standard deduction and file a joint return, as we plan to. (And in reality, because we also receive interest and dividend income from non-retirement accounts, our taxes would be higher than $14,000.)


The solution: Shelter as much of our work income as we can from income taxes by putting the maximum in our self-employed 401(k) plans. Then, as needed to meet living expenses, draw down principal from non-retirement accounts, but always keeping enough for emergencies. (Although dividends and interest we receive from these accounts are taxable, withdrawals of principal are not.)

With this strategy, we'll save more than $5,000 in taxes in 2006. We'll stay within the second-lowest 15 percent tax bracket, which means we'll pay only a 5 percent tax on qualifying dividends and capital gains. And we'll accomplish our goal of continuing to add to our tax-deferred retirement accounts.

Humberto Cruz writes for Tribune Media Services.