4 Replies Latest reply on Apr 20, 2015 6:48 PM by KateS

    Need budget advice

    Chrysalis

      Due to a number of personal issues I took early retirement two years ago and started collecting SS. For the first year, our finances went into a tailspin. Last year I decided to call the meeting to order. I put a lot of time into figuring out exactly where our money was going and where we could cut our expenses. I am delighted to say that over the course of the past year we have reduced our outgo by $1500/mo and are now (almost) at the place where our projected retirement income will meet or exceed our basic retirement expenses. Hooray!

       

      Part of developing our new budget was to add up and categorize everything we spent for one year and divide by 12. So, for example, auto and home insurance was $3000/yr and I pay it once a year. $3000/12=$250/mo so I put $250/mo into what I call an "escrow account" so that next year we will have $3000 on hand to pay the insurance premium. I did that with lots of things the are occasional and somewhat variable expenses-- medical expenses, vacation, clothes and hair, car repairs, etc. We only started this on January 1 but our escrow account is growing nicely.

       

      Now here's the problem...I set up the budget based on one year's expenses-- say we spent $600 on car repairs last year; therefore, I am saving $50/mo in escrow for car repairs. But as luck would have it, I get hit with a $600 repair bill right now. Since we're only 2 months into our new financial strategy, I only have $100 saved for car repairs. Where do I get the extra money? I guess it has to come from the escrow account (there is more than $600 there) but I'm going to need those escrow funds later. I know we're going to have some doctor and dentist bills coming up. We'd like to take a vacation some time this summer. I bet that we're going to need some home repairs between now and the end of the year (our hot water heater is making funny noises, for example ). It's going to take 12 months to "fully fund" the escrow account. But the expenses that account is intended to cover keep cropping up month by month throughout the year.

       

      So when you're trying to develop what is called a "zero-balance budget" by escrowing funds for future expenses, what do you do during the first year when you're trying to get your escrow built up? If we keep dipping into it every time we have a legitimate expense, the escrow will NEVER be fully funded. Should I liquidate some of our retirement funds to fully fund our escrow this first year so that we can get "right" with our fiscal cycle? Any suggestions?

        • Re: Need budget advice
          jkom51

          IOW, you don't have any "wiggle room" in your budget. It's important that you plan for that. As you have seen, you can't always base your future expenses on past expenditures. It just doesn't work that way 100%, unfortunately.

           

          You can apply several small solutions that might help:

          • Continue to reduce expenses. I wouldn't feel comfortable unless I had at least $150-200/mo. extra, and that's AFTER saving for overhead costs.
          • Bring in extra income: a temporary job, something part-time. Or volunteer work that gets you an opportunity to barter: your labor in exchange for something that helps reduce your cost of living (e.g., something you would normally have to buy with $$$)
          • Downsizing: Do you have anything you can sell on eBay, or at a garage sale? Even small amounts here and there can help.

           

          If those will not work, then yes, you may need to take a distribution. Have you already planned inflation into your budget? The no/low inflation rates of today will not last; change is a constant. And the CPI understates inflation in many areas, anyway, including food and services - both of which we all use whether retired or not.

           

          Good luck to you going forward.

          • Re: Need budget advice
            JerryD

            Looking at a short period for costs will usually come up short. Can you look back further to add less frequent but predictable costs to your plan (can we call it a budget)? House expenses, especially, can pop up and are usually not cheap.

             

            Even after doing this, many years of budgeting suggests that it is difficult to predict all costs and that it may just be too much work to do so. One solution is to add some "extra" to your budget in order to cover these costs using this slack. Remember to track these costs and then incorporate them into your budget, even as "Unforeseen" just to make them visible and plan-able.

             

            I did not see anywhere in your plan the inclusion of financial advice, either free or paid. There may be organizations that will provide such advice at little to no cost. Think church or other organizations. Think out of the box. For instance, we have an Extension Agency near us that offers this. What about your library? Community college? Etc.?

             

            If this is not adequate, start researching professional advisers. A one-time expense for a comprehensive plan may be well worth the expenditure at the start of your quest.

             

            I seem to recall that you have very significant educational credentials. How about substitute teaching at high schools that probably would jump at your technical training? How about teaching at community or even higher level colleges? More off-the-wall things that I have used to generate income are census work, especially special censuses in fast growing areas where they are trying to increase their Federal and state revenue sharing. Then there are Federal testing gigs like "No Child Left Behind" that last for months and pay travel costs and hourly from the time you leave your home until you drive back into the garage. With your credentials there may be numerous other gigs where employers would trip over themselves trying to get you on-board without having to pay for an expensive benefit package or long-term cost.

             

            Of course, there is always the old credit card to cover unforeseen costs. Then there is a loan on home equity. Just remember to put paying back this "loan" at a very high priority.

             

            GOOD LUCK!!!!!    :-))))

            • Re: Need budget advice
              smaneck

              Without knowing what is in your retirement fund it is a bit difficult to answer, but I would always keep a couple of years (minus Social Security) in something relatively safe. . When the market is doing well, I cash in more aggressive funds for emergencies. If the market is not doing good, I take it out of stable funds so I am not liquidating my funds at a loss.. I wouldn't take money out before I need it just to pump up my escrow fund. Remember, whatever you take out you have to pay taxes on.

              • Re: Need budget advice
                KateS

                We do the same thing, but we call it a sinking fund!

                 

                We not only have a sinking fund for annual expenses such as car repairs and taxes on vehicles (CT), we also have an emergency fund consisting of 4 to 6 months of living expenses. Should one category in our sinking fund exceed the planned amount, we go to our emergency fund to meet that expense and then we replenish our emergency fund and increase our sinking fund for the next year.

                 

                This reduces our anxiety about where funds come from and allows our retirement to grow untouched.