Scroll Top

Budgets and Retirement

retirement-3585585_1280 (Demo)

Using a budget to understand your income and expenses can help you plan spending habits, decrease unnecessary and excessive spending, and take control of your finances. For retirement planning, effective budgeting is an important step in deciding how much you can afford to contribute to your retirement plan, and how much you may need in income after retirement.

Getting Started

Simple household budget templates can be found on Excel, and there are many apps that allow users to connect their bank accounts to automatically track income and spending. Your budget is not going to be perfect from day one. It will take some testing and revision before you get it right.

Income should be the first item you include. The ‘Pay Yourself First’ attitude is a common and well documented approach to budgeting. Whether or not to include your net or gross income in your budget is a matter of preference. Your paycheck has many deductions on it, including taxes, insurance premiums and retirement plan contributions, and there is value in seeing those expenses. That being said, some people like to only see the income that touches their bank account, so they don’t include their taxes and other deductions on their monthly income. Another alternative is to include all the deductions on your paycheck except for taxes. Move forward with whichever method you feel most comfortable.

Next, break down your savings goals. How much do you want to save for retirement each month? How much do you want to put toward short term goals? Toward a rainy day fund? Then break your expenses into necessities and discretionary spending. Some necessary expenses your budget will include are; housing/utilities, food/groceries, health, and debt service/obligations. Discretionary spending can include; vacation, hobbies, sports, recreation, and dining. Note how much you think you will spend for each.

You may find that your estimations of savings and expenses do not match your income. Make adjustments until everything lines up. This is your static budget, and while it is a great place to start, it will not show the full picture.

Tracking Your Expenses and Setting Your Budget

After creating your static budget, the next step is creating a “living” budget. You will need to take a month or two to track your actual spending.  This can be a bit of a chore, especially if you are using an excel file, but it is an integral part of your budget. Fixed costs, like housing, are probably going to be right on the nose, but you will have several line items where your estimation was either too high or too low.

For each line item in your budget, compare your estimation with your actual spending. Is there anything that surprised you? Is there anywhere you can cut back? Do you have any opportunities to save more? As you ask yourself these questions, adjust the amount you have budgeted for each line item to something more in line with your actual spending, Keep in mind, each month is different and you may spend more in one month than you would in others.

Remember – having excess money at the end of the month isn’t just an opportunity to spend more, it’s also an opportunity to save more.

Living By Your Budget

As you monitor your budget, you may find you have to make adjustments. Going under budget on any item is ideal, and if you are consistently under budget it may even allow you to adjust down. If you are going over budget on something every month, you may need to make some changes.  There are two things you can change, your habits or your budget. Deciding between changing your habits and changing your budget tends to be determined by what kind of expense you are looking at. Going over budget on necessary expenses, like housing, means you may need to allocate more each month in your budget. Discretionary spending, like dining out, may need to be solved by a change in lifestyle.

You may find yourself going over-budget on something occasionally. This is ok, and generally doesn’t point to any long term changes that you need to make.  That said, you should keep it in mind the next month, and do your best to go under budget to keep things even.

Keeping Tabs on Your Debt

Debt should always be included in your budget, regardless of whether or not you have any debt. Split your debt into two segments, long term debt, and short term debt. Examples of long term debt are mortgages, student loans, and car payments, and short term debt tend to be from credit cards.

If you have long term debt, the minimum payment for each month should be a separate line item on your budget. Since these loans are generally for a one time purchase, and additional principal is not added to the loan, payments are predictable.

Ideally you want to pay off your credit card each month, before the balance accrues interest. If you are paying it off each month, these payments toward the balance of the card should not be kept on your budget. These charges will represent things like groceries, bus fare, clothing, and other day to day purchases that already appear elsewhere on your budget.  Quick tip: A way to “reward” yourself for not carrying a credit card balance and not accruing interest on the card, is to create a line item for interest payments monthly. When you do this, you set yourself up to go under-budget each month on interest payments.

Quarterly, Bi-Annual, and Annual Purchases

Each month is different, and some bills do not come every month. When planning for these, it is best to split the amount owed into monthly installments, this helps to smooth out your budget and increase predictability of your monthly average expenses. If car insurance is $600 every six months, break it down in your budget as $100 per month.

If you have any questions about budgeting or where to start, please reach out to me directly. John McAuliffe,