Today is the Day
Today we start our first month of living off our pension income. Our pensions were electronically deposited today. For the next four months, we are supplementing our budget with $400 per month that we saved for personal money and clothing, since it isn’t worthwhile for us to work the rest of 2015 since we don’t want to pay a higher rate of taxes and don’t want to increase our parent contribution for our daughter in college, as calculated by FAFSA. We plan to work for our personal and clothing money beginning in 2016, since we don’t want to draw on our retirement fund until it is larger.
Our Monthly Retirement Budget:
|Entertainment and Medical||650.00|
|Food and alcohol||540.00|
|My personal and clothing||200.00|
|Wife’s personal and clothing||200.00|
|Daughter’s health insurance||160.00|
|Internet and cable||90.00|
|Daughter’s summer food||75.00|
|Water, sewer, and misc.||218.22|
Do you have a budget? Only 32% of Americans do. Do you need to budget? From a business point of view, a budget is a planned income statement. It measures your projected profit or loss. As an individual, if you are adding to savings or paying off debt, you are running at a profit. If you are drawing down savings or adding to debt, you are running at a loss. If you don’t have a plan, you are unlikely to meet your goals.
The best way to motivate yourself to budget is to have specific financial goals. I didn’t budget until we were married. I proposed budgeting right after we got married because we wanted to pay off our debt and buy a house, so we could have a good place to raise kids, once we had them.
Our main financial goal for a number of years was to pay off the house early. That might not make sense for you, but we started with a 30 year mortgage at 10% interest. We bought a house that we could afford on a salary and half because we wanted the option of my wife working half-time, once we had children. After two years, we refinanced, with no closing costs, to a fifteen year mortgage at 8% interest. After nine years, we paid off the mortgage with a home equity line of credit at the prime rate. At the time we took it out, the prime rate was 4%. I didn’t like the idea of having a variable rate of interest, but I thought it was unlikely that the prime rate would climb above 8% in the four years in which we planned to pay it off. After a few years with the home equity line of credit, we made higher payments and paid it off as we put other bills on a 0% credit card. We paid the credit card off in a year, and so we never paid above the 0% rate. We ultimately paid off our house in fifteen years from when we took out our first mortgage.
Paying off your house could be a high priority, if you want to retire early. We couldn’t have afforded to retire early if we still had a mortgage to pay. If you are not close to retirement, it may not make sense for you to pay off your house early, since mortgage rates are so low and average stock market returns should average much higher. Paying off credit card debt should be a high priority for anyone. Putting money into a retirement or college savings plan could yield much better rates of return over time than the interest you’d save from paying off your house early.
As early retirees, we still have financial goals. We want to increase our retirement fund. I’ll eventually blog about the specifics. We do have enough money set aside for our daughters’ weddings. I need to pay off the $14,200 I still owe our savings to pay off my MBA.
Monitoring Your Budget
Your plan doesn’t mean anything if you don’t follow it. We monitor our budget on slips of paper we carry with us. I have one for budget categories I am responsible for in my wallet and she has one for budget categories she is responsible for in her purse. For categories we both use, we keep track on a magnetic white board on our refrigerator. Our twenty-one year old daughter uses the app of mint.com on her phone. It links to her accounts to keep track of her budget, as well as her financial assets. When I was a kid, I saw an entry on using the envelope method of budgeting in the World Book Encyclopedia. I’ve heard Dave Ramsey mention it before on the TV show he used to have on Fox Business. In this system, once you pay your regular bills, you put cash for each budget category you have in labeled envelopes. When the envelope is empty, you quit spending on that category, or you make the decision to take money from another category, where you need it less. The important concept this makes clear is that you need to live within your budget. In the system we use, we will transfer money from one budget category to another, if needed. If you let categories run negative balances, you’re not staying within your budget. If you have a budget, how do you make sure you follow it?
This Wednesday through Friday, I plan to blog about how Americans actually spend their money, percentage budgeting (particularly at retirement), and the behavioral finance concept of mental accounting. In future weeks, I plan to talk about individual budget categories and how to minimize expenses.