$11,500 richer, incalculably happier

Q3: Becoming more strategic

Armed with the lessons of Q1 and Q2, my husband and I were determined to do better. I signed up for a project that would bring in about $20,000 in the coming six months.

We earmarked that cash to meet our goals and cover our bases. We would, as the money rolled in:

• Pay off our remaining credit card debt ($7,500).

• Pay taxes (about $4,000).

• Replace four ancient windows in our house to save money on fuel (about $5,000).

• Divide the rest between our emergency fund, retirement and vacation savings.

The lessons of the first half of the year also inspired us to develop a spending plan that was more rigorous than the 60% Solution. If you suffer from carelessness, you need a more detailed cash-flow analysis.

We started by tracking our grocery expenses, which according to the budget experts among the Women in Red is a good way to overhaul your spending plan.

Consumer debt: $6,700.

Emergency fund: $1,300.

Long-term savings: $40,000.

Retirement: $16,800.

Home equity: $35,000.

Net worth: $86,400.

Q4: Taking a risk in order to grow

We stumbled upon the perfect house and decided to buy it. This move was so controversial that financial bloggers lobbied Time magazine to make me "Dumbest Money Writer of the Year."

In reality, once my husband and I did the math and made some tough decisions, the move was difficult but doable. We tapped out my husband's personal nest egg for the down payment and postponed paying off our credit card debt to use some of my freelance windfall for closing costs. My husband decided to get a part-time job so we could afford the mortgage.

Buying this house has already turned out, financially and emotionally, to have increased our wealth and happiness to an extraordinary degree:

• Even though we paid $15,000 more than the asking price for our new house, the appraisal came in at $10,000 above the purchase price -- the boon of buying a stellar property in a down market, from people in a rush to sell -- and a real-estate agent estimated its value to be even higher.

• We kept our first house as a rental property, which will allow that equity to grow for a few more years. Yes, we'll still have expenses, and being a landlord isn't a picnic. But homes are steadily appreciating in this area, thanks to its proximity to New York City, so holding on to it is a smart long-term investment.

• As I type, I am sitting in my new office, which is such a quality-of-life improvement that it's practically worth the $225,000 we paid on its own.

Consumer debt: $5,900.

Emergency fund: $2,100.

Long-term savings: $0.

Retirement: $17,400.

Home equity: $85,000.

Net worth: $98,600.

Lessons for the year ahead

If you've never reviewed the financial ups and downs of your past year, I highly recommend this exercise.

While it's interesting to see how the numbers rise and fall, the real education comes from the lessons that emerge from between the decimal points. Here are some of mine:

You need a plan, really. Our biggest mistake was stepping into 2007 without a serious financial plan, other than just surviving the first year as new parents and transplants to a small town. Our total retirement contributions for the year ended up being only about $3,000, for example -- far short of the 10%, or $7,200, we should have put aside.

This is particularly embarrassing because I was earning more. A clear financial plan not only provides a cushion for when things go sour, it ensures that you use any extra funds to further key goals.

I was so busy (and worried) about earning enough to support the three of us that it never occurred to me to plan for a surplus. If I had, we could have easily paid off our debt and still achieved our other goals.

Keep your eye on the ball. I've learned a number of smart money moves, yet it was clear as I assessed 2007 that I still suffer from sporadic financial carelessness. The only remedy for that is more consistent financial monitoring and a detailed budget.

Thanks to our strategic awakening in the third quarter, I gained an unexpected good habit: I kept our goals written down on a piece of paper, which I carried with me everywhere. Whenever I got nervous about losing control of the money, I looked at that blueprint, and it not only boosted my resolve, it really did ensure that as the money came in, we spent it according to plan. Hey, whatever works.

Plan for the unexpected, too. 2007 taught me to plan for all of the expenses that you expect, as well as the ones you don't expect -- but most of all for the expenses you sort of expect. (You know, for example, that an old car will need a repair, just not when.) In other words, my ING Direct savings account proved to be my cushion and my salvation. Saving is what makes financial sanity possible.

My 2008 budget needs to be revised to reflect our new circumstances, rental income and expenses, increased savings and retirement, and my husband's $400-to-$500 monthly income.

Expect a full report.

Published Jan. 9, 2008

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