Once you retire, you will learn very quickly that you are going to need to learn how to live on a fixed income. Depending on your earnings the last few years you worked, your income may be high enough that you really don’t have a problem, but you can never know when the economy might tank you’d be found running out of money before you run out of month! That’s a terrible place to be.
Budget….Budget….BudgetThe only way to know for sure you can live on your fixed income is to work out a budget. I like to do this on my computer so it does all the math for me instantly and I can see when I’m about to run out of money. Make a list of your fixed expenses first: house loan or rental payment; car payment; insurance, personal loans, etc. Fill in the amount of each of those payments and deduct them from your total monthly net income. This is your bottom line income….the cash that you actually have after all the deductions are taken out of it.Next list the items that might vary each month: utilities, phone, food, entertainment, medical, church giving, credit card payments etc. You may have more categories than that. Now the best way I think to come to a budget amount for each of these categories is to take a 12 month average. If you have your checkbook set up on your computer in a spreadsheet or in something like Quicken or Quickbooks, you can probably pull up a report for the 12 month average. I keep my checkbook on a spreadsheet, so I can go through my entries for 12 months and pull out the ones I code as food and get my yearly total there. Divide by 12 and I have a 12 month average. This may be a little time consuming, but it will be well worth the time. Once you have your last 12 month averages for all of those variable categories, add them up and subtract from your monthly net income. That will show you the money that is left over for discretionary spending: clothes, entertainment, gifts, etc. Allocate what you think you will spend in those discretionary areas and subtract them from your monthly income balance. If you run out of money before you run out of categories, then you are going to have to reduce your discretionary spending until you can get everything in without going over your income balance.
Don’t forget to put some savings into that budget. It’s common to see people setting aside 10% of their income for personal savings. You never know when that rainy day will come, and you need to be prepared for it. My financial advisor told me to pay myself first. Then work out the rest of my budget. That was pretty good advice. He also told me to keep saving until I had at least 6 months worth of net income set aside drawing interest somewhere. Now you can do this several ways. You can put this savings into a regular savings account at your bank or credit union where it will draw variable interest from month to month. You can also put this savings into a mutual fund where it will also earn dividends based on the performance of the companies represented in the investment portfolio of that fund. Some funds are very specifically invested in a narrow segment of the stock and bond market—-like technology stocks. Others are called more balanced in that they spread their investments over several parts of the market so that any possible losses in one segment would be offset by gains in another. You can also put your monthly saving allowance into a money market account and let it build up until you have enough to invest in a high yield CD or bond, but know that CDs and bonds will tie up your money for a specified period of time, and you might not be able to pull it out in an emergency without paying quite a penalty. Whichever way you choose to save, do plan on saving regularly even if it’s only $25 a month.
Monitor by the Month
Now that your budget is set up, you will have to monitor how well you are sticking to it by the month. If you have an area where you are overspending, it’s important that you commit to a plan to reduce spending in that area or edit your original budget plan to put more money in that area that needs it. Remember, if you add money to one area, you’ve got to subtract it from somewhere else. Let’s not be like our federal government and put the excess spending on credit!
Speaking of Credit
Pay off those credit cards as quickly as possible. I like to double up on the card that has the lowest balance and get it paid off quickly. Then I can add the amount I was paying that card to my next lowest card’s payment and get it paid off quickly. I continue in that way until I have them all paid off. I still use my cards, but whatever I charge in one month, I make sure to pay in full. Never carry something over for several months because interest charges will just be lost money. Always pay more that the minimum balance on your cards. If you just pay the minimum, you will end up paying on it for years and years, and the interest will be your hard earned money down the drain!
I hope this helps you think about how you will live on that fixed income. Please know that all of this advice is my personal opinion. I am not an expert by any sense of the word in the area of investments. I know just enough to have some opinions. Before you do any investing in the market, please consult a registered investment representative. Get some professional advice about how to get the most out of your savings. There are lots of choices of how to invest your money so that your tax liability is legally protected. (tax free investments, municipal bonds, etc.) Your not throwing away money if you choose a reputable investment counselor. Pick wisely. Yes, they make money on the investments you buy, but if they are really reputable, they will not take advantage of you. Your brother-in-law’s mother’s third cousin might not be the one to choose. Ask your CPA (if you use one). He/she works with people’s investments all the time and will probably be able to recommend a brokerage house to use. I deal with Edward Jones Investments and H.D. Vest Investments, and I’m pleased with both of them. But you pick one that suits you. Don’t hesitate to set up an appointment to interview the rep and get a feel for what kinds of investments he might suggest. The appointments are free. You only pay fees when you buy the investment, so interviewing several reps from several companies might give you a better change to pick the one you have the most confidence in.
Let me know if you have other areas of financial concern that we should address together.