When I talk to people about financial planning, they want to know answers about if/when they can retire, if their pension will be enough, can they send their children to college, how to plan for student loans, and SO much more! Interestingly, there is one thing that every single financial planning topic is based on… Your budget!
Almost everything in financial planning runs on assumptions, but the one spot that we need to have as accurate numbers as possible is:
What do you make each month?
And
What do you spend each month?
The issue is, too few people know these numbers. And this is exactly why keeping a budget is so incredibly important. Too often, I find that people will hear the word budget and the hairs on their arms will stand up or their eyes will glaze over. A budget is just a list of transactions that you have spent during that month, broken into various categories. Once you have a record of where your money is going, you can start making decisions on other important topics.
For example, let’s pretend that you are going to make $50,000 from your pension each year and your spouse will have no pension but has access to a 401(k) with an employer match. Will the pension be enough for you to survive on without having to touch the 401(k)? (p.s. this is a very common question I get asked). For a family spending $48,000 per year, the pension is enough! For a family spending $85,000 per year, the pension is not enough!
That is the importance of keeping a budget and knowing your numbers. The family who has a budget can know, without a doubt, if the pension will be enough or if they need to have other retirement accounts. If you know your numbers, we can easily build in a $2000 monthly expense to send your child to college, we can determine when you are able to retire and not have to go back to work, we can work the student loan system to lower your adjusted gross income… All by knowing where you are currently at!
Without knowing your numbers, it is all just guessing. And I don’t think either of us wants you to be guessing with when to retire. As an action step, start with listing out your last months transactions. You can use pen/paper, excel, an app, it doesn’t matter! Once you have them listed, start categorizing things based on what you were spending on. You can include going out to eat, shopping, gasoline, target/amazon, and whatever else you spend your money on.
Do this for a few months and start to look at your own trends. Where are you spending money? Are you spending money on things that actually bring you value or are you spending out of convenience? Are you spending a similar amount per month on the various categories?
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