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pre-retirement budgeting

November 19th, 2010 at 12:00 pm

Before I retired I had a spending plan. This method of tracking spending evolved over a number of years. Basically the plan was to have money available as it was needed to buy the things I wanted. It was based on what I had spent the previous years, what I made, what my goals where and what I wanted to buy that year. It was frequently modified as I recieved raises, my expenses changed or my goals changed.

My paycheck was directly deposited into my checking account every other week. Once a month I would make deposits to my savings account. As money accumulated it would be moved from savings to either stocks or paying down my house. My spending plan was based on recieving 2 paychecks a month. Those 2 months a year when I got 3 paychecks a month, the money was allocated to investments - either stocks or prepay the mortgage.

I kept $3-5K in my checking account as a baseline. I knew all my expenses could be covered for a couple of months with that and I didn't have to worry about running over. I also kept 3 - 6 months of expenses in my savings account. Once it got to 6 months I frequently put half in savings bonds or some other investment.

Before my check was deposited in my checking account I had the full amount I was allowed to invest in my 401K taken out off the top. I invested the full amount allowed every year since I was 30. I also took out short-term and long-term disability, health insurance, and an amount for flexible spending on health care items based on what was used the previous year. I tried to make sure my tax deductions were set up so I was as close as possible to owing $0 when taxes were due.

At the beginning of each year I would set my financial goals. The major one was saving for early retirement and I tried to increase the amount saved by at last $1 each year. After that I kept a list of short-term goals such as things I wanted to buy when I had saved up the money; New chair, vacation etc. I would pick what I wanted to buy for short-term goals at the beginning of each year. I generally allocated about $100 a month for that. So my goals might be

1. completely fund 401K
2. completely fund Roth IRA
3. put $5000 toward prepaying mortgage
4. put $600 in vacation fund
5. Buy new chair $400 - 500
6. buy $5000 in stocks with any extra money

Once the goals were decided, I started figuring out how to make room in the budget to fund those goals.

Most of my monthly fixed expenses were paid automatically in one fashion or another. Monthly fixed expenses were taken off the top of the budget and included the mortgage, HOA, heat, electric, phone/internet, and satellite TV.

After monthly fixed expenses were occasional fixed expenses: house and car insurance and property taxes. Based on the previous years amount I determined how much was needed each month and it was set aside in my checking account until needed. I had a spread sheet I called reserved funds where this money was tracked month to month. Accross the top of the spreadsheet was listed Jan - Dec. Down the side was each category I wanted to track. Categories included Emergency fund, car insurance, house insurance, property tax, xmas, gifts, short-term goals, maintenance/repair, new car, investments and miniatures.

Then each month I would add or subtract to each column based on whether I was saving money for something or had spent money for something that month. That also let me know that $4500 of the money in my checking account was reserved for other things and don't touch.

After fixed expenses came items I was saving for. These were tracked in the reserved funds spreadsheet. I bought my car new and expected to keep it at least 7 years. I was putting aside so much per month so that I would have the total amount when needed. At one time I was putting aside money for my neices collage also at so much per/month.

I had a category I called Maintenance/Repair which was for car repairs, appliance breakdowns, etc. This was funded monthly until it got to a certain dollar figure. After that I didn't put money in the fund until I spent some and had to restore that money.

I decided at the beginning of the year what gifts to give and how much to spend and tracked that amount each month in two categories xmas and gifts. The xmas fund might build up for several months before I ever spent any of it, but was there when needed.

Short-term goals was another fund and might include more than one goal, for instance a new TV and a vacation. New carpet and a new computer.

Investments was another category and could include more than one thing. For example I might put aside $500 a month to fund next years Roth IRA in January and also put $500 a month towards pre-paying the mortgage.

Miniatures was my hobby, but I didn't spend money on it every month so a certain amount was set aside each month and maybe the entire amount would be spent in one month of the year.

The savings/reserved money categories included the following:

Car Insurance
House Insurance
Property Taxes
New Car
Collage fund
Roth IRA
pre-pay mortgage
new carpet

After those categories came the few variable categories that I wanted to track and a large miscellaneous category. At one time I tracked clothes, but after a couple of years I saw that I spent between $300 and $600 in clothes every year and it was all needs. I don't care about clothes so since I knew I was only buying what I needed I quit tracking it. Entertainment was another category I stopped tracking after a couple of years. I did it, I just didn't think it was excessive and knew it wasn't a category I cared about that much.

I want to know how much I'm spending, not necessarily on what. I only track categories that I'm interested in learning how much I am spending in that category. Pre-retirement those categories included groceries (all cleaning, paper products, pharmacy and personal care items were included in this category), restaurants, neices, gas and books. Everything else was tracked under misc. Amounts of planned spending in these categories where based on what had been spent the previous year and if I was happy/unhappy with what I was spending in each category. These were categories that could easily get out of hand when I didn't pay attention to them, which is why I tracked them, it helped to keep them under control.

I used a spread sheet to track monthly spending. Accross the top were the categories I was interested in. Down the side was 1 - 31 for each day of the month. If I bought groceries on the 6th then I would put the amount in that column/row. Then I would the total the amount in each category at the end of the month. It was a simple way of tracking for me. I still use this spreadsheet for tracking, but some of the categories have changed.

Basically that was it for the spending plan. Seems more complicated than it was. Anytime I got my 3rd paycheck a month that was invested wherever the decision had been made at the beginning of the year. Sometimes money built up from unusual sources or bonuses or whatever and I always had a plan for unexpected money, usually savings or pre-pay the mortgage. Ocassionally some of it was used for fun.

I will do a seperate post on me spending plan post retirement.

I finished reading my book All the Wyers of Pern by Anne McCaffrey. Sci/Fi - very good.

4 Responses to “pre-retirement budgeting”

  1. Ima saver Says:

    Very smart bookkeeping!

  2. frugaltexan75 Says:

    Wow! You certainly had a good plan in place from when you were young, and it paid off!

  3. janine Says:

    good post and nice

  4. Shiela Says:

    Hey, this is pretty much what I do too. Your spreadsheet is like mine, except mind just automatically adds everything up. I just log on each expenses everyday. Great to see that I'm on the right track.

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