Create a Budget

Many older clients I talk to have never had a budget and don’t want one. But at the same time, they are worried they won’t have enough money to retire. This is where some tough love comes in. Whether you like it or not, following a basic budget is the best way to live comfortably in retirement.

It’s very easy to talk about budgets and the importance of a budget, yet many clients have worked for 40 years and have been able to save, so whatever budget they had worked for them. And I understand that clients want to be enjoying their money in retirement––not stressing out over what they can afford. In fact, the worrying is the advisor’s job––that’s what the client is paying for. But it makes life so much easier for an advisor if they know what their clients’ spending habits are like. (For related reading, see: How to Build Retirement Income with Annuities.)

I don’t mean that you necessarily have to log each and every dollar you spend either. Most people are guilty of not having a perfect budget––and it’s okay. Work out a compromise between having a full-blown budget and having none. And at the very least, create a budget that breaks out fixed costs including property tax, insurance, medical and basics (car, food, shelter). In fact, every budget should break expenses in two columns:

Fixed and Required Expenses

These include things you must pay for in order to survive:

  • Housing
  • Food
  • Clothing
  • Insurance
  • Medications

This category is only for non-optional expenses–– everything else needs to go into the second category. No exceptions.

Everything Else in Your Budget

Anything that is not integral to living and surviving goes into this second column–– and everything in this column instantly becomes optional. Yes, that includes travel. As much as most people look forward to traveling in retirement, it’s important to be realistic with your savings. If you simply don’t have the funds to do it, you need to pay for food instead.

Put another way, no matter what your current financial situation is, it’s important to remember that just because you have the option to spend money on something, that does not necessarily mean it’s a good idea.

If you feel the need to track every last dollar as part of your budgeting efforts, you should go back three months and look at what you spent. If some expenses are paid only once a year, you can factor those in later. Most budgeting books encourage you to start keeping track of your spending starting today, tomorrow, or at the start of the next month. Those methods simply don’t work.

Looking at behavioral reasons alone, you’ll be careful about what you spend going forward because you want the spreadsheet of your expenses to look good–– only to be upset later because you feel restricted from spending your own money.

By looking into your past spending, however, you’ll be able to identify your impulse buys and reflect on whether or not they were really worth it. Through that, you’ll develop better clarity about your financial habits and realize where you need or want to improve. (For more, see: Gen X: Can Your House Cost You Your Retirement?)

For example, I once met with a couple who was struggling to save enough and wanted to know what they could do to improve their situation. After looking back at their past three months of spending, they realized that they had spent an average of $1,000 a month on eating out. Once they realized that this wasn’t how they wanted to spend their money going forward and that the experience wasn’t worth it to them, it was easier for them to increase their grocery bill and still save $800 per month for other goals.

By breaking spending into two categories––the absolute necessities and the wish list items will separate––it means you won’t jeopardize your financial future for the wish list. This actually makes it less stressful, too, when your advisor points out you don’t have enough saved up. It doesn’t mean you’ll be poor; it just means that you have to approach wish list more strategically.

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