How to Budget for Retirement

My husband gets paid twice a month. Because he is paid a set salary, we have his income budgeted to within $10. It's nice to have it done this way because we know all of our bills will get paid every month. We don't have to worry if we are going to be able to pay a certain bill, and we are still able to put a little bit of money back every month. We have a small emergency fund that we can use for emergency expenses, such as a new pair of car tires or something else relatively small. We have almost reached our "6 months savings." (A lot of financial planners recommend that you have enough money saved to pay all your bills for 6 months if something comes up. They recommend this being your first line of savings, and kept somewhere easy to get into.) We even have a small retirement plan started through my husband's work. People often wonder how we are able to do this every month, especially on only one income. The key is to set a budget and stick to it.

The first thing you need to do to draw up a budget is to take a good look at your expenses. Several of these will be easy to budget in because they are a set amount each month. For utilities and bills that change from month to month, I would budget an amount of money that tends to be toward the high side of what your bill could possibly run. For example, if you are looking at the last six months on one bill, and you paid $140, $125, $150, $145, $115, and $120, I would recommend budgeting $150 for that bill. The extra money you might not use on it can be added to your emergency fund.

Once you have a list of all your bills, don't forget about things like groceries and transportation costs. It's also a good idea to leave a small percentage of your income free for incidental expenses. There are a few small things that you don't use every month that you will need money for. These include things like tune ups for your car and replacing heating and/or other filters.

Now that you know what you spend every month, compare it to what you make. If your income fluctuates, ideally you should make your budget based on the lower range. During months that you make more, you can add the extra to savings or pay down any interest you might have on a credit card or other loan.

Once you've got these numbers, check to see how much money you will be able to save every month. Ideally, you will have the six months savings already, but if you don't have that much, it's okay. Make it your goal to be able to save enough money for one month's expenses during the next three. If that's really not attainable, you can set it even lower. But keep in mind that this stash is probably the most important. If something happens and you can't work, bills still need to be paid. If you keep working right up until retirement, you can always add the money to your account then. Taking money out of a retirement plan early can end up costing you a lot in penalties.

If you don't think you will be able to save an adequate amount of money each month, see if you can cut expenses. Do you really need cable TV? What about your cell phone? Can you get rid of it, or at least lower the plan? See if you can find other ways to cut back on expenses, too.

Once you have your six months savings, put the money you were saving for it, toward paying off any loans you have. Pay off your credit cards and car payments. Consider adding a little bit of extra money to your mortgage payment each month. If your employer matches your 401K contributions, now is the time to start considering that, too. Otherwise get rid of every bill you have that collects interest (with the possible exception of your house payment). You will end up paying more in interest to these companies than you make by putting your money in savings, so it makes sense to pay everything off first.

Once you get all your debt paid off, start saving all the money that you were spending on those bills. You will be so used to spending it, that you won't even miss it, so it won't be hard to save it. Talk to a financial planner about all the different options you have. Pick a few and you will have the start of a retirement plan in no time.