After throwing a lot of numbers in my 2005 financial plan, let me share a deeper level of details behind the plan.
My Job Income
My base salary and cash-like expatriate allowances, which make up about three quarters of my job income, are very stable income I can count on. Annual bonus, which can be up to 20% of base salary, is very contingent on performance -- so far in my Microsoft career, I usually got somewhere between 14-16% every year. The value of equity component of the package (in the form of Stock Award and Stock Option), is highly dependent on Microsoft's stock price -- my current performance will also drive my future equity compensation, but has no affect for the immediate year.
My Wife's Job Income
My wife is taking a part-time, working-from-home job and making some pocket money now. So far, it is fair to say this strikes a very good balance of work/life balance. Of course, as evidenced in the last two years, her job income is a wildcard of our financials (I mean it both ways :-)).
Family Business Income
Our sideline business is doing good since the start of 2005. While we cannot spend much time on it lately, we do expect it to continue to deliver a stable cash flow. Opportunities exist in some major investment in time to further improve the product and offering.
We expect we will have an average of $450,000 in our investment accounts for the year. Even at an ultra-safe 4.5% money market account yield, we can count on a return of more than 20 grand. The reality is we do expect to put majority of our investment assets to stocks and mutual funds, and the return can therefore fluctuate. I'm targeting a 7.8% return for the medium case, and 10% for the best case.
Stock Option Gain/Loss
As long as I'm holding on to the stock options I received between 2001 and 2003 (those will only expire starting in 2011), my net worth will move substantially with every Microsoft stock price move. By the end of 2006, every dollar price change in MSFT will bring more than $8,000 before-tax swing in my balance sheet.
Unlike the income side of the plan, which can change significantly without too much control from us, the expense side of the equation is highly controllable. We do expect we will spend about 30% of what we earn -- it is fair to say that an annual living expense budget of $95k is pretty lavish in Shanghai, so the expense budget is definitely on the conservative end.
Our tax due will likely evolve based on our investment gains, family business profits and effective (or ineffective) exploration of convoluted international tax system. On the other hand, we expect some investment gains will be delivered in tax-advantaged accounts, and some (if not all) of our family business profits can be shielded in tax-deferred accounts too.