If you are like most people who like to hit the pillow at night knowing that ends are meeting at the end of the week or month, you probably have a household budget. Maybe it’s a simple pie chart with the usual pieces: food, mortgage/rent, car payment, clothing, entertainment, etc. You keep an eye on it, and if something comes up that isn’t budgeted, you adjust here and there to keep those ends meeting. If you have investments, like a 401k, you probably have a piece of that pie labeled, “retirement savings,” or even “long term care,” depending on your age.
At some point, that retirement or long-term care piece, as well as investments, are going to be much more at the front of your mind as you edge closer to the end of your career. And that’s because of the obvious adjustment to your monthly income: You will no longer draw a salary or paycheck. Instead, your “paycheck” will come from those investments you’ve been nurturing for several years – or even decades.
So, with that in mind, and no matter what stage of your career you are in, how do you create a monthly budget that optimizes your savings (and eventual retirement)? First the good news: You don’t have to give up every single bit of fun that you currently enjoy. In fact, a budget that is too extreme in this way can end up failing. You need something to look forward to at the end of the week or month, or as you have time. Just be careful with the types of extracurricular activities and what they cost.
One way to think of savings, whether retirement-focused or not, is the idea of reallocation of money to different areas of your budget as certain expenses come to an end. And this is what I like to call “sneaking” money into the savings.
For example, let’s say you have a baby in diapers, which costs you $150 a month. When that diaper stage ends (and it will, I promise!), add it (or a portion) of that expenditure to the savings slice of your monthly budget. I’ll bet if you make a list right now of monthly expenditures that are going to sunset in the next six months, year, and five years, you’ll be able to prepare ahead of time for shifting the money elsewhere. Is your teenager almost done with braces? Reallocate that $75 a month you are already paying to the orthodontist to your retirement budget. Is your car going to be paid off next year? You get the idea.
One obvious counterpoint to this idea is that when one expense ends, another begins. In that case, try to at least allocate a portion of the money to the savings if you can’t put away the whole amount each month. In fact, perhaps that diaper or car payment money gets split three ways: one-third added to the monthly savings, one-third added to a “future weekend away” fund, and another third applied wherever the need is greatest.
As your family ages, other examples of opportunities to reallocate money, and therefore add to that retirement nest egg include grocery money as your kids move out of the house or lowered insurance premium as kids secure jobs that provide benefits.
With a little planning ahead (make that list), you’ll more easily shift money that’s already spent, so to speak, into the savings, rather than into the general “fun” zone.