Planning your Retirement from Z to A Part VII. “Making ends meet, budgeting and inflation.”

Blogging Crap with Chip

The dreaded budget. It’s complicated, it’s no fun, it’s constrictive, it’s unacceptable.

Budgeting and making ends meet doesn’t really sound like a lot of fun.

But as it turns out people who budget and buy things on purpose actually feel better about what they have and enjoy life more.

Dave Ramsey said, “A budget is telling your money where to go instead of wondering where it went.”

Your budget will not limit you, it will free you to do the things you really want. You need to keep that in mind all the time. The first three months of budgeting are the hardest. After that it gets exciting. Why? Because you see progress and you begin to feel empowered.

Budgeting doesn’t have to be a big chore. It doesn’t have to be complicated, it doesn’t have to be boring and it surely shouldn’t be depressing.

Once again I will ask the question… “What is retirement for you?”

I just want to make sure that you focus on that, because you are working on your retirement, not mine, not your friend’s, not your children’s… yours and yours alone. Of course if you have a significant other, then yours is plural, after all, you need to be on the same page.

If you haven’t already, write down your Z to A retirement plan. You may not have all 26 plans written down, but I would suggest you have at least five to ten plans lined out. (see Part II for ideas.) Remember that over the next few years you’ll be working your way backwards with the goal of reaching your A plan. How close will you get?

So plan Z is what you consider your worst best-case scenario. This plan is the least you want to accept in life and if that’s where you land at the end of your “work” life cycle, then you’ll be just fine. That said, it’s Plan A that you’re reaching for. Plan A is everything you’ve ever wanted in retirement.

To make things easy we’ll start budgeting for Plan Z. Once this plan is in place, you’ll go over it every 3 months or Quarterly (to use a fancy term).

Let’s say your new life budget starts in January. You would look over your budget the first few days of April and see what went right and what went wrong. Don’t expect to be perfect, hell, I’ve been doing this for almost twenty years and I’m still screwing up here and there. Things are always happening that are out of your control too; you can’t worry about that. You have to take control of the things you can. So minor deviations from the budget is expected, but, with practice you’ll be able to set aside funds for the unexpected and be better prepared for those things you can’t control.

One of the most exciting and addictive things about budgeting is watching the Red Sea of Debt going down and the Green Sea of Savings going up. Now, I don’t want to scare you off, but I go over the budget once a week. Every Friday night or Saturday morning I sit down and pluck my numbers in. For me as an ADHD, it keeps me honest; it’s something I need to do. You’ll find your path too.

How do you create your budget?

First you’ll need to sit down with your partner and get all your stuff out in the open. I’m going to assume you have written down your plans Z, Y, X, W and V. All these plans should include how much money each plan will cost you in the future. At a minimum have Plan Z ready.

Here’s an example.

Let’s say your plan Z is for you and your partner to work at a minimum wage job until you’re 65. At 65 you’ll get your pension and enjoy reading books and going for walks, work in a garden and watch a few shows before going to bed. This is your life.

When creating your plan Z, you’ll want to make sure of a few things.

  1. You’ll want to be debt free. That means no credit card debt, no car payments and if you’re lucky enough to have a house, no mortgage etc…
  2. You’ll want to have as much savings as possible. This is made easier when you have no debt.
  3. You’ll want to know how much this life will cost you. Rent, insurances, electricity and any other bills you will probably have.
  4. I would suggest using a 5-7% inflation rate. By doing so, you’ll most likely overshoot the cost of actual inflation and be able to have a larger financial cushion. You can find inflation calculators online.

    If you find that a 5% inflation rate is too high and intimidating, then use a 2.5% inflation rate, this is a solid number that is probably more realistic over a long term. I just like using higher numbers because I’d rather overshoot on my projections (that’s just me).

From 1914 to 2022 the average inflation rate over that time is 3.02% year over year. That means that if something cost $100 in 1914, in 2022 it would cost $2,481. That’s over 108 years.

Let’s say you’re 40 years old (in 2022) and your rent is $1000.00 a month. You plan on retiring at 65, that’s 25 years away.

Over that 25 years inflation is high, say 6%, your rent in the year 2047 would be about $4317.00. At 2% inflation your rent would be $1650.00. You see how important it is to look into the future?

Some of this may look scary but know this… in 1994 I was paying $750 a month for a one bed apartment and today in that same market (2022), I would be paying $1300. That’s with an average inflation rate of 2% over that time period.

Here’s what you can do over the next little while, before we go too far and the thought of future inflation scares you off of making plans for your future.

Over the next few weeks,

  1. Write down how much you owe on every credit card and what the interest is on every card and how much interest you pay and what your minimum payment is.
  2. Write down any loans, like line of credit and car loans and do the same as with number 1.
  3. Write down your mortgage payment or what you are paying in rent.
  4. All other bills, taxes, life insurance, car insurance etc.
  5. All of your monthly spending: food, gas, booze, restaurants, netflix, internet, cable, the list goes on.

Once you have all these things together you’ll see and know where all your money is going. When creating your plan Z, you’ll keep just the basics.

  1. Rent or city taxes (we’ll try to get you mortgage free by the time you retire)
  2. Electricity/Hydro/gas/oil bill
  3. Food

These are the things you need to live. A roof, electricity and food. After you have those things down, we’ll start to spoil ourselves with a car, insurance, gas, cable and such.

Ok, get out of here and start working on it. We’ll see you in a couple of days.

To be continued…

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