Budgeting while retired
We go on a yearly golf holiday for a week every summer and a friend of mine budgets well for it and I don’t do as well. One of the secrets of his success is he thinks of expenses as yearly expenses. So, for example, if he buys a cup of coffee at the local Starbucks for $5.00 a week, he does not see that as an expense of $5.00 but as an expense of ($5.00*52= $260.00). I have been trying to get into that mindset for a few years and still have a problem thinking as he and his wife do, but they have done this for 30 years and so it is part of their way of looking at their family budget.
For those on a fixed income, which is almost all of us who are retired, budgeting is an important part of how we can enjoy our retirement and not run out of money. To budget, we must get a handle on these expenses and our revenue.
The expenses we must think about are:
· Fixed Expenses: These are expenses where you know the cost and it doesn’t change. Rent, Mortgage, Insurance, Loans
· Variable Expenses: These are expenses that will go up and down in cost. Hydro, Water, Grocery, etc.
· Irregular Expenses or Projected Expenses: Expenses that come at a certain point in the year. They may be one-time expenses or more frequent but not monthly.
With many variable expenses, you can move them into fixed expenses, by averaging out your payments. In my area, I can opt to make equal monthly payments on my Hydro, Gas, Property tax, and Electric bills. This allows me to budget and know how much we are spending every month. The issue that many of us find a problem is our Irregular expenses. As stated above these may be one-time expenses or expenses that are more frequent. My house insurance is a one-time expense that comes every year at the same time, while my prescription costs come every four months. To budget for these expenses, I have set up a savings account and put equal amounts every month to make sure that when the payment is due I have the ability to pay, without going into debt.
As you look at your expenses it may be already clear that you know what your irregular expenses are and you can plan for them by:
1. Your first task is to make a list of all your expenses including your irregular expenses and categorize them.
2. Recognize that you may not be able to gather all of your future expenses at one time because some pop up out of nowhere.
3. Record which expenses you will have to pay for throughout the year including any irregular expenses you are aware of when you do your budget.
4. Write in the projected expense cost when it comes due
5. Divide that number by the number of months until the bill is due and adjust the numbers if you find out the bill will be higher.
6. Do this for the entire year of irregular expenses (guestimate if you don’t know the exact number)
7. Save the dollar amount of irregular expenses in a separate savings account only for irregular expenses. Some banks and credit unions may allow you to automate the transfer of money, which is an easy way to put it out of mind while setting aside the money you need.
a. For example: If you find out you have an irregular expense that is $200 and it’s due in June and it’s May you have two options.
i. You add it to your expenses budget and save for 2 months.
ii. You pay it and go into debt then set aside $34.00 a month so you have enough money for next year to pay it and to pay yourself back for the amount you paid this year.