Look. I get it. I’m sure by your fifties you expected to have more control over your spending and a considerable nest egg for retirement. Unfortunately, you may not. College tuition, adult children living at home, aging parents and divorce are just a few of things that may have sent your finances in a tailspin. But with retirement looming, there is no time to waste.
I think when you ask most people what their dream retirement will look like, they envision travel, maybe re-locating and/or spending tons of time doing the things they never had time for when they were working. And while that sounds awesome and certainly something to look forward to, the reality of crafting a life you love after you stop working, is that your dream life will cost money. Maybe a lot of money. And if you don’t prepare and plan for the financial side of your vision before you retire, all you will have is a lot of time on your hands.
Who wants to worry about money when they retire?
If you have struggled your whole working life with making ends meet and living paycheck to paycheck, retirement may not look any different for you. That’s the hard truth. And it sucks. Big time. But the good news is it is never too late to get control of your finances.
Budgeting is the key to financial freedom, no doubt about it
I bet you have at some point tried to budget. And just like a highly restricted diet started on New Year’s Day, you probably didn’t stick to it for very long.
Most people fail at budgeting because they choose creating a budget as their starting point for taking control of their money. But if you don’t have a clear understanding of what you are currently spending monthly, you will probably allocate funds in your budget erroneously, thus setting yourself up for failure.
A spending analysis is the first step to taking control of your finances
Numbers don’t lie. Do you know how much you are spending monthly on your mortgage (rent) and utilities? Probably. But how about groceries, eating out or gas? You more than likely will guesstimate. And that’s not good enough.
If you have ever watched Shark Tank or Dragon’s Den, you will have seen entrepreneurs that were drilled by the investors about their numbers. Those that didn’t have the answers quickly lost their chances for a deal. Numbers matter when it comes to financial success and you need to know yours.
Ideally, you need to gather 3 to 6 months of records to work out your average monthly expenses
This sounds like a lot of work. I’m not going to lie. It is a lot of work but will be a huge eye opener for you and hopefully the kick in your butt you need to make real change when it comes to how you spend your money going forward.
To start this process, you will need to gather and/or print all of your statements, including credit cards, lines of credit and bank accounts for a minimum of 3 months. Keep them sorted by month. You will also need either blank sheets of paper, a notebook or like me, you may choose to purchase an account ledger.
Make it simple, make it detailed
Work on one month at a time. Grab your first statement. Go through every transaction and assign them to a category. The simplest way when using blank paper or a notebook is to use a page for every category. Write the transaction from the statement on the appropriate category page. If you are using a column ledger, write the categories at the top of the columns and write the transactions in the corresponding rows and columns.
Place a check mark beside the transaction on the statement so that you know you have transferred that amount to a category page. This way if you get distracted or have to stop, you know exactly where you left off.
The more specific you can be when assigning categories, the better. For example, you may at first glance choose to put take out coffee under the “eating out” category. However, giving it it’s own category gives you a better snapshot of your spending. Avoid lumping too many related things under one category heading. It is easier to decide to lump categories together when you have completed compiling all your numbers for the month then having to go back to dissect a large total to figure out exactly why so much money was spent in that particular category.
Don’t forget to create a category page for cash, interest and bank charges/fees.
Once you have gone through all the statements for the month, add up the totals for each category for that particular month. Circle or highlight the totals so that they stand out. If you are using blank paper, staple the category pages for that month together.
Now you are set to start working on the next month on blank paper or new pages in your notebook.
Once you have all three months (6 if you’re ambitious) worth of transactions categorized and totalled, you need to make a spreadsheet of all the totals. You can do this manually or use a program like Excel. Write the months across the top and the categories down the left hand side. Then go ahead and transfer all your totals to the corresponding fields on your spreadsheet. When you have all of your numbers written in, it’s time to do some simple math.
At the top beside your final month, write the word “TOTAL”. Go ahead and add your rows across and place that figure under the column “TOTAL”. Do that for every category. Once you have completed all the totals, drop a new column beside “TOTAL” called “AVERAGE”. Divide each total figure by the number of months you have compiled numbers for and write that number under the “AVERAGE” heading. Do that for every category.
You now should see the average you spend for each category every single month. This information is gold and the key to finally taking control of your finances. Knowing where you spend your money helps you create realistic budgets and goals.
Here is a FREE spreadsheet you can download and print. Just click the image to open.
Does anything surprise or shock you? Can you see areas you can work on to reduce spending? Do you have a lot in the cash category and have no idea where that money went? How about interest charges? Is that making a big dent in your wallet?
Can you commit to reducing 10 categories by $5 a month? Or how about 5 categories by $10? Seems doable yes?
I am a firm believer that small changes are lasting changes. Reducing one category by $5 or $10 a month can probably be done with little impact to your lifestyle but cumulatively they can make a huge difference over time to your bank account.
Choose the categories you believe you can work on reducing and write each one down on a separate piece of paper. Write down your average spending total so that you can monitor your progress. Write down your goal for reduction. Is it $5 or $10 or maybe you are even more ambitious. Then list all the ideas you have to reduce your cost in that category so that you could reach your reduction goal.
For example, to reduce the amount you spend on take out coffee, you could go down a cup size or eliminate one takeout coffee a week. That won’t hurt will it?
How to start saving money for retirement
Every little bit helps
Keeping a constant eye on where your money is going is key to staying on track and saving money. Every morning, I sit down and write in my ledger the transactions that went through my accounts the day before. All of my statements can be viewed online so it is so easy to do. It only takes a few minutes everyday.
And then I transfer money I didn’t spend into my savings account. For example, that coffee I downsized or didn’t buy saved me anywhere from $1 to $3. I immediately put that money away.
Most people think they have to save big right off the bat. And that is simply not true. Especially if you have never saved before. Don’t set yourself up for failure with lofty goals! The old adage, “Take care of the pennies and the dollars will take care of themselves.” is true. You won’t miss that dollar you transfer to savings but over time, it will add up. And the real bonus is that once you see your account increasing, you will be encouraged to find more areas to save and more money to transfer to your savings.
For those that don’t have time to assess 3 months of spending:
Would I prefer you do all the steps outlined above. Absolutely. But I am realistic. I know that some people don’t have the time, don’t have all the statements or get overwhelmed by that much information. It’s ok. Really. Don’t beat yourself up about it. However, you can start from today going forward. Start categorizing your spending each day until you can complete the 3 month spending spreadsheet. Each month you analyze will give you real numbers that you can work on and set goals.
Saving for retirement is about control right now
There are a lot more steps to crafting your dream retirement but knowing where you are spending your money and controlling where it goes right now is a huge step towards making your ultimate retirement dreams come true. It’s time to stop burying your head in the sand and hoping you will win the lottery.
Know your numbers.
Be aware of where your money goes.
Take small steps to reduce spending.
Control happens when you decide to exercise it.