You may have made the New Year’s resolution to spend less and save more, but by now almost 80 percent of people have failed their resolutions. One way to achieve resolution success is to write out your goals and objectives. You have to know where you want to go or you may wind up somewhere else!
A budget is the most basic financial plan. During the accumulation phase of life, budgets are important in order to have the money to put into investments. During the distribution phase of retirement you have to know how much you need monthly so you know when you have enough to start retirement. You need to know exactly where you are spending money you are earning today or money you are withdrawing at retirement.
The first thing you need to do is to track your spending for a month. Track everything, including that $1 cola from the vending machine. Write it all down. Yes, it is a nuisance but it is important.
It is also fun to look back to see how a present month differs from a month 10 years ago. When you are done tracking your expenses, separate each purchase into a category. Categories that you might use are food, gas and transportation, utilities, entertainment, etc. You can create as many categories you want. This is your working budget, and it has to be something that you understand.
Examine the amount spent in each category. Do the totals surprise you? Look at the variable spending categories like entertainment and food. Generally these categories are the most shocking. The actual cost of a round of golf and lunch or perhaps dinner and a movie every week really adds up. These categories are also the easiest to curb spending in.
Once you have determined your monthly spending, subtract that from how much you bring home. If the number is negative, then your savings has to be enough to cover the short fall. If you are spending more than you’re earning, you have to be accumulating debt.
If your number is positive, then you need to ask yourself if you have an emergency fund of three to six months’ worth of expenses. If you don’t, you need to save this amount in a liquid account, like a money-market or short-term CD, as fast as you can. If you do have an emergency fund, you’re ready to start investing if you are young or contemplate retirement.
The idea of retirement is exciting. Having a working budget now, as you prepare, is a vital key to success when you retire later. The budget is as critical in many cases as the savings themselves.
Joseph “Big Joe” Clark is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com, or 640-1524.
