Tuesday, May 25, 2010

Budgeting for Pension cuts-8 Expense reduction

At this point in the process, some serious thinking has to take place about what must stay in the future budget and what needs to be cut or eliminated. Having worked out the amount of annual disposable income available after the pension cut, your expenses have to be less than that, or else you will quickly eat through your savings.

Just as a reminder, disposable income is gross income from all sources minus income taxes and property taxes. At this stage you need to look over your expenses and make sure you have separated them into those you consider musts and those you consider wants.

You may have some discretion in terms of calculating the amount of money needed for some of the musts, but in general you will need to budget for all of them first to make sure that you can afford housing and living healthy, with enough to eat. So items such as Food, Medical, Mortgage, Rent,Utilities, and Insurance become essential and must be paid for. It is possible to reduce some of those categories by careful planning and thinking, but it is important that you pay for those items first.

Food bills can be reduced by carefully watching for coupons offered by grocery stores and making sure that you shop on the day when they give senior discounts. Publix and Krogers for example in the US offer 5% discounts on Wednesdays to seniors and that adds up when you consider how much is spent on food over a year. Krogers also offers a card that is free but which allows you to shop at an already discounted price. Also there are wholesalers, such as Cosco, who offer food in bulk at lower unit costs. So it pays to be a savvy shopper.

Mortgage rates are at an all time low at the moment, so it is really worthwhile considering refinancing your mortgage. You can also extend the range of the mortgage so that it reduces the monthly payments.

Make sure you take advantage of any exemptions offered by your town or county or province or state in terms of property taxes so that you can maximize the disposable income to start with. Same applies with income taxes. State and provincial taxes vary and it may be worth your while to consider moving to a lower tax base, though there could be offsetting costs that may affect you so research the choices before taking any steps.

Downsizing is another alternative of course to reduce the amount of mortgage payments,taxes, insurance and maybe even utilities and maintenance. There are many new offerings for seniors that provide excellent housing alternatives in smaller residences that also provide maintenance and community support. So this may be the time to consider such a move and thereby reduce your on going costs.

Once you have thought through all the costs that you consider "musts", subtracting that from your disposable income will give you what I consider as real discretionary income. This is the money you will have left over for things like eating out, entertainment, travel and gifts.

You may consider some of these items as more important in which case you will have to prioritize them to determine which ones you want to fully fund, and which you can cut back on. For example if you eat out every Wednesday with a group of friends, maybe that's something you still want to do regardless, in which case you should plan to continue that at the expense of something else.

This is all a balancing act aimed at making sure that you have enough money to live as closely to your desired lifestyle as possible. Only you can decide which items are more important than others, and it may be a painful process to decide, but in the end it will be better to take a stab at it rather than hope for the best and end up short of money.

This will probably take a few iterations in order to come up with a viable budget. You and your spouse need to work this out together because you each may have different views of what is more important, and this process may avoid some confrontational debate if one partner makes the decision to cut something that the other one considers top of the list for keeping.

You should work at the top level of your budget categories to start with. For example you should think of money for Entertainment as a whole rather than start to look in minute detail at movies, shows, tv , book etc. Once you have decided on a top level budget for all the items then you can start looking at the sub divisions to see what you can afford. Perhaps you will only be able to go to the movies once a month instead of four times, or maybe you need to cut out some of the premium channels on your TV listings. Or perhaps you can start borrowing books form the library or join a book club instead of buying hardcovers as soon as they come out.

The idea is to come up with a plan for each element in your budget. You know it won't be perfect because as time goes along priorities often change and unknown expenses occur that impact the plan. So you will need to be ready to adjust, and part of that is to plan for some savings in your disposable income. If you budget it all and you spend it all there won't be anything there when the unknown expense hits you. So build in some contingency.

Also this is a dynamic thing. You will probably find that once you start this process you will have to repeat it as you get a better understanding of your real costs. Hence you will need to keep some records and review them on a basis that you feel comfortable with. It's almost certain that your expenses will be different from what you budgeted, and you will have to make adjustments as you go.

In the next post I will discuss the records that I keep, to try to stay abreast of the budget and expenses. I usually look at this monthly as I feel more comfortable doing that. For those of you who were in some management position in Nortel you should remember the monthly budgets, and like most of us you probably considered that a drudgery. However it was good training for what we are now facing, and I urge to take advantage of those lessons so that you can keep your own finances in control and enjoy life with what you have.

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