As financial planners, we receive one question frequently: How much money do I need to retire? While it would be nice if there was a universal number, the truth is that everyone’s number is different. Every individual and family has different goals for what their retirement will look like, along with different lengths of time spent in retirement. Before we can plan out retirement goals, we must start with today’s cash flow and see where that money is going.
The best way to do this is to develop a budget that tracks current spending and savings. In this article, we’ll go over a few steps to dial in spending habits and develop an effective budget that you can use as a retirement planning tool. While tracking spending can seem overwhelming at first – following a few simple steps over the course of a few months will result in an effective budget that can be adjusted to meet future goals.
Step One: Track Current Expenses
The first step to developing an effective budget is figuring out where your money is currently going. This can feel like a daunting task – especially if you’re not currently tracking spending. To help you get started, I recommend starting big and then dialing in more granular details later. Determine how much money is coming in from all income sources during a typical month, and then how much money is flowing out for your monthly expenses. Even if you think you’ve got a solid grasp of whether you have extra for savings or if things are tight from paycheck to paycheck, it’s often surprising to see the details in black and white, and to see the actual surplus or deficit that’s around at the end of each month.
Step Two: Identify Spending Categories
After you’ve identified your monthly cash flow, the next step is to determine where the money is flowing. Start by breaking out your expenses into different categories. An easy way to break it up is by Personal & Family Expenses, Home Expenses, Vehicle Expenses, and Insurance. Whatever expenses work for you and your spending are sufficient for this step – there’s no right and wrong way to categorize for your budget. If you use a credit or debit card for most purchases, you may be able to sort your spending into the categories easily from your banking website or app. Additionally, there are many third-party budgeting apps that can help organize your finances. Monarch, Rocket Money, and CoPilot Money are a few options. All have different functionality and price points. Once you’ve broken out the different categories, it’s time for step three – analyze the typical spend in each.
Step Three: Track Spending Amounts
Once everything is categorized appropriately, it’s time to see how much money is going to each expense. Normally it’s helpful to look at a minimum of three months of spending to get accurate spending trends. Things can change month over month, but with at least three months of data, you can start to get a feel for the typical amounts in your budget. It’s also important to factor in annual bills into your budget. Things like auto & property taxes, insurance, and other items may be paid once a year instead of monthly. Typically, it’s easiest to divide the annual amount by 12, and factor it into your monthly spend that way. That way the money is accounted for, and months where an annual bill comes due isn’t a big surprise to the budget.
Step Four: Analyze & Make Adjustments as Needed
After seeing the actual amount spent each month, you may be surprised to see the total being spent within your budget categories. While some items may not be able to change, it’s normal to find areas where overspending is occurring on a regular basis. This is the time to consider if your spending aligns with your priorities and values – and if there’s anywhere that adjustments can be made. If you find areas to cut back within your spending, those funds can then be used to increase savings, reduce debt, or meet another financial goal. Once your budget has been analyzed and adjusted, it’s good to revisit the budget at least every 6 months to see what’s changed. Income, expenses, and priorities are constantly changing, so keeping in touch with where things are at ensures that you don’t drift away from an effective budget over time.
At Pathfinder Wealth Consulting, we encourage our clients to track their spending to ensure we can accurately plan for their financial futures. We believe that everyone can benefit from a personalized financial plan. Whether you’re just starting out with your first job, going through a major life change like getting married or starting a family, or gearing up for retirement, keeping a budget can help with identifying priorities and provide clarity about your current finances. If you’ve developed a budget and don’t know where to go from here, please feel free to reach out to our team of financial planners, and we can help guide you towards your next steps.
Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.