I know I’m breaking clickbait 101 by giving you the answer in the subtitle, but I really want you to get this, so stick with me here.
This isn’t about budgeting, at least not in the traditional sense. I’ve tried budgeting in the past. Many times. It doesn’t work for me. $47.50 for groceries this week? But what if I want two cartons of ice cream?
Nah, budgeting doesn’t work for me.
But we’re not talking about budgeting here; we’re talking about planning.
We’re talking about managing your money, not just counting it. In my case, and the examples below, I was looking at retirement. But you can adopt the same principals for any planning scenario, buying a house, moving somewhere, downsizing, whatever.
For that, you need to see where you’ve been and where you’re going. Or at least where you want to go. Just like any other roadmap. Or GPS for those born in the last couple of centuries. To plot a course, you have to know where you’re going.
The GPS analogy works great here because they will plot alternate courses for you. Or change your course if you add in a stop along the way.
That’s how life works. It takes different roads. Often, roads we didn’t know existed. Or life takes a detour. You still want to get where you are going, but for now, you have to go down this side road and hope it’s not a dead end.
And while you don’t need to know where you’ve been to plot a course to where you’re going, you need to know where you are. And how you got there. And the types of roads you like to take.
Okay, enough with the map metaphors, let’s get down to business. It’s enough to know that you need to look at yesterday and look at tomorrow.
We retired a few years ago. Like many of you, we talked about it for a long time, but it was always a vague concept in the future. We’ve always done well with our money. Mostly made decent investments, saved where we could, and contributed to retirement plans. We thought we’d be okay, but it wasn’t until we sat down and mapped out the course (sorry) that we knew for sure.
The first thing we had to do was look at yesterday. Since retirement was a ways off and a long term plan, we looked at annual spending over the last several years. You don’t need to drill down too deep, just use major categories like food and utilities. We did divide food into groceries and dining out as we expected those two categories would change in retirement. Just use your bank statements and credit card bills to create a spreadsheet.
For short term planning to get started, we used months in the columns with categories in the rows of our spreadsheet. This allowed us to make sure we had accounted for everything. We totaled expenses and income and kept a running total at the bottom of each row. That total should match up with your actual cash balances. It doesn’t need to come down to the penny, but if it’s way off, you likely forgot something.
Now you see where you have been. This isn’t for budgeting purposes, but as a guideline, although it can be enlightening if you haven’t been tracking your spending. This piece is a lot of work, but once you get the hang of it, it goes pretty quickly.
Next, you can plot where you are going. For this spreadsheet, use years in the columns instead of months. It’s probably best to use five years of history. As a basis, add the same rows you used in your monthly budget. We will be adding to those rows in a minute. First, do a reality check on the running totals. The balance should approximately match how much cash you had at the end of the last few years.
So, for future years, continue with the same numbers as a base. Use a constant or average depending on which makes the most sense. Next, you need to start putting in things that will change with the new scenario, in my case, retirement.
I started with income to keep my balances positive. Positive balances are always good. First, though, the bad news. Starting in our retirement year, we decreased and then zeroed out our salaries. Oh, no. But keep in mind, that’s what you have been working toward your entire life. We then added all known future recurring incomes, such as 401K disbursements, Social Security, and pension payments.
Since we were looking long term to make sure our money would last, we added some 401K accounts and investment accounts as lump-sum payments in the year we planned on starting to take them. It didn’t matter that this over-stated our balance for that year, we were looking through all the years to make sure the annual balance stayed positive.
Finally, we adjusted expense categories based on known events, such as downsizing our home, selling one of our cars, and similar items. Then, knowing how we planned on living, we increased our dining and vacation expenses. We also dropped health insurance payments at age 65 and added an estimated cost of supplement insurance.
Now, looking at the bottom line over the next forty-plus years, we saw that we had enough money to live comfortably. We didn’t try to fine-tune too much, knowing that over time fluctuations in the markets would level out. We also knew that soon after retirement, all investment accounts would be moved into safe, non-volatile funds.
What about long-term care or nursing homes? Rather than estimating each variable, we looked at everything that would go away in that eventuality, such as home-ownership expenses and, most, if not all, of our travel budget.
Now that we are four years into retirement, I can tell you that the model worked out very well. We were very conservative in our estimates, so we have been better off than planned.
And that’s a good thing.
If you want to plan for the future and manage your money, look at yesterday and look at tomorrow.