A solid retirement plan will help keep financial setbacks under control and leave options open to compensate for the crises. You may experience several financial setbacks in retirement and saving for retirement. Pumping every thing you can into tax-sheltered sources will help tame those setbacks and leave options open. You need to ensure you are living on less than you have coming in to offset those unexpected events.
Just as you spend for those things you purchased for entertainment, hobbies and so forth you need to spend for retirement. You have a rough idea how much you need to save each month for retirement. The big money question is. How do you find that money to sock away? Where will it come from if you are already living pay check to pay check.
Spend for retirement: Now comes the hard part. There is one simple principle when saving for any goal. Spend less than you make. As simple as it may sound, it is in most cases the most difficult task to do. Even people who have large incomes find it difficult to make ends meet. The more you earn the more you spend. This is a mind set and we need to train our mind to work in our favor to meet our goals. Include retirement spending in your spending routine. Spend on yourself before other things.
Create a spending plan. A spending plan is simple to set up. It is easiest to set this up on a computer but not necessary. If not using a computer use different sheets of paper for the various categories of expenses you will be setting up. The following is only an example each house hold will have its own version.
Let us start with income: For many of us this is a simple thing to do if our job is the only income we have. For others it could be more complicated. We need to consider other constant sources we know we will be getting. You may be receiving alimony, rental income, monthly dividend, investment proceed. Only include things that are a constant source. The sources may not be the same amount on a monthly basis but there is some income. Write down the average to least amount paid of these sources to your income to come up with your grouse income.
Next consider expenses: This should be broken down into two different lists: the known expenses and the unknown expenses. The know expenses would be things such as utility, mortgage, car payments, cable/satellite fees, telephone, and news paper delivery. If you have your old receipts going back 12 months add these up to get the average expense and use this as your input. Include any expenses that are made from the net income check going to savings, investments or other sources since these are also know sources. This should cover the fixed expenditure list.
Now the more difficult list: If you are not already logging every expense you make in a journal start a journal. In this journal enter each expense you make with an entry of the amount, to whom, reason, date (any other information you may find useful). This journal will prove to be invaluable as we will see for several reasons. Include your known expenses in this journal. Not a single penny expended should escape this journal. Assuming you do not have a journal, enter your estimated varying expenditures. These expenditures would include but not limited to: Gas, oil, car maintenance, grocery, utility, medical, credit cards, clothing, entertainment, car insurance and that cup of coffee you pick up in the morning when going to work. If you don't have a clue of what you spend look at credit card statements, check stubs and any receipts you have lying around.
You now have a record of what you have coming in and what is going out. Total up the lists (this is where a computer would be nice it would be keeping an ongoing total after each entry). Compare the two totals the income should be larger then outgoing. If you have more going out than coming in you should be looking to increase your income. You should also be looking at reducing costs. Remember that expenditure log? The expenditure log will tell you where you can reduce out going expenditures. Add up on a monthly basis all the items you spend money on which was not necessary such as that cup of coffee from Star Bucks, or that gas station. Maybe that sandwich you got from subway or that soda you got out of the vending machine.
How to cut expenses: There are an infinite number of ways to cut expenditures. Start with clipping coupons. Purchase non perishable items by bulk when they go on sale so you don't need to purchase them at retail. Bargain shop where ever you go. Plan your shopping trips so that you can hit several places in one route. Instead of shopping daily make it weekly. You can save by eating breakfast at home with items purchased from the grocery store. Brown bagging your lunch, and bring in your own drinks or drink water. You will be doing two things here. You will find yourself eating healthier and saving money. Pay credit card balances off monthly to prevent finance charges. Some cards also reward with money for purchases made on the card but that is only beneficial if the balance is paid off monthly. You can also find many expense cutting ideas from books or magazines.
How to find the money you don't have. Pay yourself first. Have money deducted from your payroll going into a savings or retirement account. A good starting point is 10% of your income. Increase this amount every year by 1% when getting pay raises. You will not feel the pinch and you will be increasing your savings more than the annual pay raise amount. Money you don't see is money you will not spend. Join an employer retirement account if available. Pre tax money going into this account is a great tax advantage. Put any bonuses or unexpected income into savings. Put your tax return into savings. Review you expenditure plan at least quarterly making the appropriate adjustments.
In summary: Identify what sources of income you have and the amount coming in. List all expenditures and subtract that from your income. This is the amount you should be putting in savings. If it does not match or exceed your savings goals you need to seek means of cutting expenditures or increasing you income. Last but not least pay yourself first.
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