Why would you want to set up a personal budget? Isn’t that for accountants and nerds? Actually no. Every business that wants to be successful has to have a budget and compare itself to it on a regular basis. They use what are called key performances indicators to see how well they are performing their annual objectives. Those that are successful use this information to know what actions they need to take in order to correct any areas of their business.
The same thing applies to you individually. Wouldn’t it be great to know where you are today in relation to your goals for retirement? Wouldn’t it be better to find out now that you need to take action instead of 10 years from now when it might dawn on you that you should have done a certain task in the previous decade?
What Goals Should You Determine?
The first objective is to determine how much you will need to live to retire. What will it cost each month? How much will you spend on the items you buy now. Once you add all of those up, you will need to adjust for inflation. This is a simple math calculation of taking the inflation rate (assume 4%) and adding it to one or 1.04. Now you will need to raise it to the power of the number of years it will be until you retire.
Assume you will retire in 10 years and this number would be 1.48. Another way of looking at this is that it will cost 1.5 times more to buy the same things ten years from now. Knowing this will help you determine the amount of steady income you will need to cover those expenses. (i.e. wealth ratio > 1)
Calculating The Income From Personal Budget
For example, let’s say you need $2000/month today to cover your living expenses. In ten years, that will cost you $3000/month to cover the same living expenses. So you will need to make sure you have at least this amount in your retirement income in ten years along with a means to grow your retirement income that you receive. This may not sound good to the average fixed income person. How can you grow you retirement income? (See our 4 posts on Automatic Retirement Income) To learn more on this whole process, be sure to get the FREE Retirement Audio Training from Retirement Cures.
We hope you can see the benefits of setting up a personal budget.
Until Next Time…