Creating a Budget

A lot of people cringe when they hear the word “budget.” I get it. But whatever budget software or process you decide to use, the most important thing is to know where your money is going so you can reach your goals. If you don’t know how much you need to pay your bills, how will you know how much to save for retirement? One of the biggest retirement derailments I see is overspending due to not having a clear picture of income and expenses.

To make sure you don’t underestimate your retirement needs or miscalculate how much you can spend in your golden years, create a retirement saving and spending plan specific to your lifestyle and your needs. While the general rule of thumb is that you’ll need 70-80% of your pre-retirement income to live on in retirement, that number may be more or less for you.

To start, get clear on your current spending habits. Ask yourself these three questions:
● What are your annual living expenses?
● What are your liability payments (mortgage, credit cards, loans)?
● What are your insurance premiums?

If you don’t already have a system to track your expenses, I recommend Mint. Com or You Need a Budget (YNAB).

Once you have these numbers, add them up to arrive at a total annual and monthly living expenses figure. Then compare that to your after-tax net income. Is there a surplus that is unaccounted for? If so, you have either underestimated your expenses or you are spending your cash surplus. If there is a surplus, set up automatic deposits into a savings or investment account so you aren’t tempted to spend it.