If you’re not yet retired, a well-prepared monthly budget provides a clear picture of what your current lifestyle costs. You and your advisors need this information to determine when you can retire, how long your funds should last, whether you will need to make changes, etc.
When you’re retired, setting and adhering to a budget is the simplest way to maintain healthy finances. In fact, successful retirees are unanimous in their endorsement of calculating and keeping a personal budget.
Since setting a monthly budget is something of a lost art, here is an example of the process:
- Determine a realistic figure of your monthly expenses. Estimate it if you haven’t yet retired. Remember to include discretionary expenses for entertainment, vacation, membership fees, and gifts. Also remember to calculate and include the monthly cost of things you pay for quarterly, bi-annually, and annually (e.g., property taxes, insurance, car registration, etc.)
- Calculate your monthly income. This will include pension payouts, annuities, Social Security or Canada/Quebec Pension Plan, income from bonds and/or preferred stock, and any employment income. Work with your financial advisor or accountant to determine the recommended distribution amount from IRAs or RRSPs.
- Account for regular contributions to savings for expected or unexpected expenses. Expected expenses include the mundane, such as replacing your car, roof, furnace, appliances, etc. Expected expenses are also linked to any plans you make such as taking a special trip, remodelling your home, or helping someone pay for college. They might also include paying for help around the house as you get older, as well as funeral, cremation, or burial arrangements.
As for saving for the unexpected, be realistic about what could happen, such as an injury from a fall or car accident, sudden illness, increased medication costs, temporarily supporting a family member, increased property taxes, or higher heating costs.
- Compare income to expenses. If you’re using estimates, use a conservative approach: the lower range for income and the higher range for expenses. If your expenses are too high, create and implement a plan to reduce them, including reducing major expenses such as housing and/or expensive discretionary expenses such as a boat or vacation home. Also evaluate whether working at a money job might be advisable or required.
If you need more help creating a monthly budget, talk to your financial advisor or banker. They would be pleased to assist you or at least refer you to someone who can. You can also go online and Google “creating a personal budget.”
