Many financial advisors advise maxing out your retirement accounts - especially during your last five working years. While you may be in agreement with this strategy, you may also be wondering how you're going to go about accomplishing this goal. We suggest making a budget as you are planning for retirement.
If the thought of creating a budget at this stage in your life is about as welcome as a migraine headache, just remember that staying on track and learning to budget is a vital component of retirement planning. The knowledge of how you spend your money can allow you to make informed financial decisions in retirement. This could be the difference between a properly funded retirement and wondering how you're going to pay for everyday living expenses.
Creating a basic budget
A budget can be a simple way to track where your money comes from and where it goes. Once you know your total annual income and expenses, you can incorporate an action plan to spend less than you earn.
Creating a budget all starts with the basics of tracking your income. Since you're still working, tracking your income can be as simple as looking at your paystub and how much money you bring in each month. Be sure to include any additional sources of income such as alimony, income from commercial property, and investments, as well as any annual bonuses that you typically receive.
Once you have your annual income total, it's time to figure out how you're spending your money. Fortunately, with the modern conveniences of online banking, debit and credit cards, tracking expenses isn't as labor intensive as it used to be. Simply gather your statements and then pencil out a simple monthly budgeting worksheet in which to plug in your monthly expenses. You can do this manually on a legal pad, or find an easy-to-use online budgeting worksheet.
Once you have a solid number for your annual income, multiply your monthly expenditures by 12, and then subtract this number from your annual income. Hopefully, you'll find that you spend less than you make. If that's the case, go one step further and see if there are ways to further reduce your expenses and set aside even more to feed your retirement accounts. If you've found that you're spending more money than you make, then it's time to get serious about reducing your monthly expenditures. Take a hard look at things you have control over and where you may be able to cut back. Have you taken the time to review your home and auto insurance to see if your current rates are competitive? What about brown bagging your lunch versus eating out?
The great thing about learning to budget before you reach retirement's doorstep, is that you create a type of roadmap that could help you stay on track and meet your retirement goals. Sometimes, creating a simple budget can make you stop and take a hard look at where you are now compared to where you need to be and prioritizing where your money goes. By focusing on what you need most, you can better figure out where you can cut expenses and plan for the retirement that you've always dreamed of.