Experienced a pay cut? Here’s what to do next:
- Discuss a plan with family members
- Adjust your budget or create a new one
- Trim non-essential expenses
Budgeting is an essential part of preparing for retirement. If you compare budgeting to any sport, you can imagine that without the proper practice and discipline, you may not reach your ultimate goal. The same applies to budgeting – without a clear strategy, good saving habits and a strong commitment to improve, you might never achieve your ideal retirement.
Use a budget to keep track of what you’re spending and saving to make sure your retirement is as comfortable as you envision it to be. The first step when budgeting is to track all your expenses – like utilities, housing, car payments, groceries, healthcare and entertainment – and categorize them on a spreadsheet. Gather your credit card and bank statements and review what you’re currently spending by category to determine your current budget; subtract that from your income to understand how much you can save.
Saving for retirement is key, and you may not want to rely solely on extra money you’ve put away at the end of the month. Diversify your savings to maximize your retirement planning opportunities by contributing to an employer-sponsored 401(k) or opening an IRA. Both have greater earning potential in the long run.
A budget isn’t something that you make once and put in a drawer. Keep your budget up-to-date and reassess your spending needs for various stages in life so that when you get to retirement, you’re used to managing money responsibly. By regularly updating your budget, you will be more aware of recurring issues in your spending habits and adjust accordingly.
A budget isn’t something you make once and put in a drawer.
Review your budget and savings at least annually, possibly at tax time, after year-end holidays or near your birthday. During this annual review, consider what changes have occurred or are anticipated for the future. For example, if you’ve had a raise or paid off debt, try to put a significant amount of the additional income into savings.
The quality of your retirement depends upon the financial decisions you make now. Are you budgeting and saving? Are you putting away money in retirement accounts, such as IRAs and 401(k)s? If you open these retirement accounts early and contribute to them frequently, you will accrue more money for retirement on top of the money you saved through regular budgeting. Along the way to retirement, make sure you plan for life changes, as this will determine your spending power and plans for the future.
What you want for retirement not only depends on how you save now, but it also depends on your goals. Perhaps you want to retire near your children where the cost of living may be higher or lower than in your current area? Factor into your retirement budget the cost of care for an elderly parent or other dependents, if needed. While the budgeting process starts now, continue to budget into retirement to ensure a secure future for yourself and your loved ones.
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