6 steps for creating a retirement budget

A budget makes it easier to pay bills and reduces the stress of unexpected expenses.

  • By Tom Sightings,
  • U.S. News & World Report
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For many retirees, the fear of running out of money is their greatest worry. They don’t know how to stretch their Social Security benefit to pay all their bills, or they are uncertain about how often, or how much, they can dip into their individual retirement account or other retirement savings.

According to a 2019 survey from the Certified Financial Planner Board, barely 40 percent of Americans track their expenses and make a household budget. For the rest, budgeting simply means spending whatever income comes in during the month – or maybe more, if you haven’t yet reached your credit limit.

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That’s where a budget comes to the rescue. A budget shows how you spend your money and where you can make adjustments to fill the financial holes. It also helps you prepare for the nasty surprises that inevitably come along in life, like a major home or car repair or unexpected medical bill. By having a plan, you avoid a lot of stress and reduce all those fears about not being able to pay your bills.

Here are six steps for creating a budget that will keep your finances in good order and help put your mind at ease.

Gather your financial records together

To make a plan, you need to know where you stand. Haul out your checkbook and your credit card statements so you can access your records for the past year. Many credit card companies offer a yearly summary to make this step easier. And tax season is a good time to do this, since you’re already using much of this information to fill out your reports to the IRS.

Make a list of your fixed monthly expenses

These are your expenses that are the same every month. They include your rent or mortgage, a car payment, your Medicare payment and anything else you do that gets billed in equal monthly amounts, from a gym membership to your cable and phone bills.

List your regular monthly variable payments

This step is a little harder, since some bills change every month. They might include your heating and electric bill, your ongoing medical expenses, grocery bills, pet fees, gasoline charges and entertainment costs. Look over your bank statements and credit card bills. Total your spending for the year in each category, then divide that number by 12 to arrive at your average monthly cost. There are ways to convert many of these variable bills into fixed expenses by signing up for monthly plans or paying in installments, but be aware that there could be an extra charge for this convenience.

Estimate non-recurring expenses

Are you planning to take a vacation or buy a new car this year? That’s a special expense that requires advance planning. There are other bills that you pay only once or twice a year, such as membership dues, some insurance bills or medical expenses, home and car repairs and birthday and Christmas gifts. Once you figure out what occasional expenses you're dealing with, add them up and divide by 12 so you can set money aside for them every month.

Compare your total expenses to your annual income

No two months are exactly alike, so you may go over or under budget from month to month. But over the course of the year your spending should match your income, hopefully with a little to spare. If you’re spending more than you take in, then you’ll have to make some changes. Having a budget will make this step easier, since now you know where your money is going and where you can cut back with the least amount of pain. Depending on the shortfall, you can make fairly minor changes, such as reducing entertainment expenses. But this is also where you might have to make some lifestyle decisions. For example, if you want to do more traveling, you might want to downsize and live in a less expensive neighborhood.

Check your budget periodically to make sure you’re on target

Creating a budget is useless unless you test it out to see that it’s relatively accurate and that you're really following it. You should check your budget every month at first, to see if it makes sense. After you’re comfortable with the process, checking once a year may suffice. But remember, a budget is not a legal document, it’s a guideline. Having a budget is not meant to restrict your life, but to make it easier to track your spending, avoid getting into trouble and take the stress and anxiety out of your financial life.

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