If you’re like most people, you’ve never lived on a budget.
For most, the term or concept “budget” is constricting. It’s an outside force telling me what I can and can’t do.
The reality is a budget is simply telling your money what to do and where to go. It’s proactively being in control rather than being controlled by your money. You can call it whatever you want… ultimately it’s just a plan.
So, do you need a budget in retirement? The reality is cash flow control is a must in retirement for many reasons.
First, the margin for error is small. We don’t have the backup of being able to go back into the workforce. We don’t have the luxury of taking as much as we want out of our investment accounts. Research and history has shown there is only so much we can safely take out without running out.
Second, people who have a plan for their money experience more peace of mind in retirement. Whatever system you incorporate or live on will give you a greater sense of security that you’re able to live year in and year out within your defined parameter. Knowing that you are consistently drawing only the predefined amount out of your portfolio will give you much greater confidence that your retirement plan will go the distance.
What exactly are the principles of budgeting or cash flow management that should be a part of everyone’s plan?
The first step is to define a finish line for your retirement expenses and make sure that they are in keeping with a sustainable withdrawal strategy from your investment portfolio. Include all spending both monthly and non-monthly.
Second, only the predefined amount needed for ongoing expenses should be distributed into your main bank were operating accounts (for more info on how to use a margin, fixed, and variable accounts see my free e-book)
Third, and perhaps most important, is that there must be a way for you to spend based upon the available balance of the spending category and not the bank account balance or available credit from the credit card. This is new for most and where I would suggest people focus their attention if they are new to budgeting.
For example, the typical way to manage cash flow would be to use a credit card to make a purchase or to refer to the bank account balance (or what I remember about the last time I looked at the bank account balance) when I make a purchasing decision. Unfortunately, that is ineffective and does not allow you to stay within the predefined annual boundaries for retirement spending.
The more effective method is to establish the amount available each month or each year for “spending categories”. That could be “eating out”, “vacation”, “clothing”, etc. There must be a current awareness of how much is available to spend in each category so that every decision is made in light of this balance. This is the most challenging aspect of budgeting… Determining how to maintain an awareness of the balance of each spending category in a way that is easy, portable, and sustainable.
Some rely on old-school methods of envelopes and cash. Others rely on “virtual envelopes” available inside of smart phone apps. Whatever method you use is not as important as that you have a method and that spending decisions are made based upon the available balance of the category. It’s also critical that updates are made to the spending category balance in real time, not weeks and months later… after the fact.
If you’re able to institute a “spending based upon the available balance of the spending category” system and philosophy, you will have mastered cash flow management.
If you’d like more information about how to institute a system, download my free e-book