Retirement Planning - Part 2

My last two articles have been on the Importance of Budgeting and Retirement Planning; I’ve gotten quite a number of responses from individuals who indicated that the articles were timely and very informative considering our current economic environment. A number of analysts have indicated that we could be in this recession for another 12 to 18 months but we just don’t know; they are also indicating that we need to tighten belts if we are to whether this storm. Many of you have approached me indicating that you want to have a comfortable retirement and that safety net (Savings), but you don’t know how to proceed or what the first step should be.

A number of years ago, a friend approach me with the same issue; she and I sat down and formulated a budget, when we first looked at her income versus her expenses she was deep in the red (more expenses than income) and she really didn’t have anything to show for it. She had however made up her mind that she was going to save and plan for retirement. It was a slow process bringing her expenses in line with her income and then to the point where the income exceeded the expenses. She realized that her income would only grow at a small percentage each year and that she would have to manage her expenses more effectively. She was willing to make the necessary decisions and make the sacrifice to put her in her comfort zone. Four years later I am proud to say she has achieved the goals she had set for herself a number of years ago; she has a savings, an individual retirement plan which she contributes to regularly and she is about to move into her own home.

So you may be asking what do I have to do to get started. Well let’s take a hypothetical situation for example. John and Sarah Doe they have a combined salary of $41,600; that works out to be $3,466 per month.

Then we have to list all of the expenses; some of the more common expenses are:

Mortgage/Rent
Utilities – BEC
Utilities – BTC (Include Cell Phone & land lines)
Utilities – Water & Sewerage
School Fees – (Generally paid quarterly)
Grocery
Insurance – (Car, Life & Health)
Bank Loan
Church Tithes
Credit Cards
Cable Bills
Personal Savings (Pay yourself first)
Miscellaneous

A monthly budget is an essential tool for ones personal financial success. Before you can know where to invest your money, you have to have a clear picture of where it’s coming from and where it needs to go. By using a spreadsheet to compose your monthly budget, you can make quick modifications at any time and stay confident that all of your totals are mathematically correct and absolutely up-to-date.

For most of us we know that our primary source of income is derived from our salary and this amount generally only change on an annual basis. So we know what we have to work with. In our example John and Sarah Doe has $3,466 to spend on a monthly basis.

Then we need to look at what we spend; the first thing that comes out of our salary is national insurance which in this case would workout to be $117.86 for the two individuals.

Then you would allocate 10% for church tithes ($346.60) and 10% for your personal savings ($346.60). You would always want to pay yourself first, what you don’t see you generally don’t miss.

Back to our example we’ve taken out for national insurance, church tithes and personal savings leaving $2,654.94 to cover the remainder of the monthly expenses. For most of us we know what our fixed expenses are; that is the expenses that do not change from month to month. These expense included our mortgage/rent payments any bank loans our insurance payments. We should try to maintain our total debt load inclusive of mortgage/rent expense of no more than 36% of our gross income; for our example that would represent $1,247.76. That now leaves us with $1,407.18 for the balance of the expenses.

An individual difficulty comes when they start to look at their variable expenses; these are the expenses that are incurred every month but change month in and month out. These are the utility bills, grocery bills, credit card bill, cable bills and the dreadful category of miscellaneous. Most of an individual’s impulse buying comes in this category and this is the area that we need to focus most on, not saying that the other expenses are any less important. When we look at this category we have to weigh our needs versus our wants; for example ladies my opt not to go to the salon on a weekly basis, the guys may have to cut back on happy hour Fridays or instead of purchasing lunch daily you may want to make a sandwich and bring it to work. At first it will not be easy, but if we adopt these changes to our spending habits it will go a long way providing an individual with financial stability.

At all times we should look at ways to reduce our variable expenses unfortunately this is easier said than done and it doesn’t happen over night. Credit cards should be the first variable expense that we should try to reduce since this carries the highest interest rate; we should always try to pay more than the minimum payment this would help pay off the balance a lot quicker

As individual progresses and takes more control there budget, the individual will eventually find themselves saving more each month, and with an individual having more disposable income they can now take those funds and put it towards a savings and retirement plan.
The more determined we are to control our expense the better position we will be in financially in the long run so that in the event adversity hits we will be better able to whether the storm.

“Remember the longest journey beings with the first step”.