My Personal Finance Journey

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Financial Plan 2008, Part 3: Spending and Tax

Contributed by mm | December 27, 2007 11:01 AM PST

plan08.jpgEarlier in this Financial Plan 2008 series I shared the respective 2008 outlook of our household's earned income and investment income. Today I will complete the itemized list of planning assumptions by discussing the spending and tax picture of 2008. Still, the discussion will follow the planning framework we adopted earlier (so that if you read all three posts, you can assemble our 2008 Financial Plan yourself).

5. Our spending level in 2008 will be flat in Chinese Yuan terms but will increase by 6% in U.S. Dollar terms.

There are several counter-currents in the play. First, the expected continuation of the U.S. Dollar depreciation against the Yuan will be translated into higher U.S. Dollar spending since most of our cost structure is denominated in Chinese Yuan. Second, in the middle of 2007 we moved to a larger (and therefore more expensive) apartment, and our son moved from kindergarten to elementary school (read: higher cost from private school), so these two of our biggest spending categories will cost us more in 2008. Third, the local economy has a lot of inflation brewing these days -- the latest CPI reading indicates 6% annual inflation -- and inflationary pressure will almost certainly continue in 2008.

On the flip side, we recognize that having four overseas family vacations in 2007, while certainly affordable, is probably on the high end of what are willing to spend, and therefore we will likely reduce the frequency and visit more domestic places (we actually visited more cities outside of China than within China so there are definitely a lot more to explore without flying long hours).

All together, we think we will be able to keep our spending growth in line with the speed of Yuan's appreciation.

6. Our tax bill is likely to be 25% smaller in 2008.

The forecast on tax is decidedly the hardest, but after all the headwinds we discussed so far, we finally may be looking at some help from the tax line. Let me start by emphasizing that the tax accounting at PFBlog is always on accrual basis (instead of cash basis) from the very beginning, which means we estimate recognize tax liability whenever our portfolio appreciates (and vice versa). This allows faithful reflection of our true financial picture and avoid distortion to net worth calculation during tax-bearing investment transactions.

There are several things that may work collectively in 2008 to produce a favorable tax picture for us. First, once we count out further employee stock option appreciation gain, we will have a smaller tax bite (which will be partially offset by higher investment income from our actively managed portfolio, which will grow in size and return in absolute dollars). Second, our slightly shrinking earned income will mean a smaller tax base. And third, my employer upgraded the tax gross-up policy for benefits in July 2007, so in 2008 I will be able to collect the full benefit of the new policy (versus six months in 2007), and that's a handsome sum of several grands.

Offsetting that will be the appreciation of Yuan (again). Since 60% of our tax burden is paid in Renminbi, our tax bill in dollar terms will be unfavorably affected by 3-4% in 2008.


Now that I have shared my best-effort estimate of the six key drivers behind our net worth growth in 2008, will you be able to put together the annual financial planning model like I do? In the final post of our Financial Plan 2008 series, I will share the result and final thoughts.

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