A budget is a plan for every dollar you have. It's not magic, but it represents more financial freedom and a life with much less stress.
Here are a few budgeting tips.
Try the 50/30/20 Rule
Allow up to 50% of your income for needs.
Leave 30% of your income for wants.
Commit 20% of your income to savings and debt payment.
Define your expenses into three categories
1. Necessities - These are fixed costs that you must make on a monthly basis. These required payments carry consequences if they are not made. For example: mortgage/rent, utilities, credit card payments, auto loans and insurance.
2. Savings - This consists of long-term savings goals. Saving early in life and consistently will help you address unexpected emergency spending and prepare you for retirement.
3. Lifestyle - This is non-essential spending like leisure, entertainment, dining out and travel. Think of lifestyle spending as the remainder of your spending after necessities and savings. This ensures that your fixed costs and financial priorities are addressed first.
Create your budget
Having a visual budget allows you to revisit your budget as needed. Your income, expenses and priorities will change over time. Adjust your budget accordingly, but always have one. Use this budget worksheet (xlsx) as a guide.
Chances are if you're traveling somewhere you haven't been before, you're going to look up directions that show you how to get there. The same idea applies when it comes to spending and saving. Creating a retirement budget may be one of the most important things you can do to prepare for retirement.
Consider your income
Where will your retirement income come from? You will likely live off four main sources of retirement income:
1. Social Security benefit
2. Public pension benefit
3. Post retirement employment
4. Savings such as an IRA or retirement account (MNDCP, IRA, 403(b), 401(k))
Keep in mind - Social Security and pension benefits are intended to cover a portion of your post-retirement income needs. It is important to maximize your retirement savings and personal savings to help ensure you enjoy the retirement lifestyle you envision.
Track your expenses
As you compare your current expenses to expected expenses in retirement, some current expenses will go up, and some will go down.
Expenses that may decrease:
Payroll taxes (e.g., FICA)
Retirement plan contributions (e.g., contributions to your IRA or employer sponsored retirement account like the MNDCP.
Housing - Your mortgage may be reduced or paid off.
Transportation - It's hard to believe just how much your commute costs. Once you retire, you may save more in gas and auto insurance and auto maintenance may also decrease.
Expenses that may increase:
Health care - You may be paying the same or more for health coverage as you age. Medicare is not free and does not cover 100% of your health care and prescription costs. You may even be paying for a supplemental health plan.
Travel - Many have dreams of seeing more of the U.S. and even the world. And if you plan to be a snowbird for the winter, there are additional costs that add up.
Create your budget
Now that you have a good sense of your financial needs in retirement, see how your spending stacks up against your expected income sources. Use this budget worksheet (xlsx) as a guide.