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How to Start and Manage Your Home Budget

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Because you are reading this financial blog, it’s likely that you already have a home budget. Maybe it’s a formal budget that you stringently follow. Perhaps you follow an informal budget based on a lifetime of experience and knowing what things cost. There are plenty of great articles detailing how to get started with a home budget.

However, something you may not have ever considered is the need to assess your budget based on the different phases of your life.

Life Phases of a Home Budget

There are a few ways of dividing up your financial responsibilities as you mature through life. But generally, you’ll find life budgeting is divided into four or five phases:

  1. Early Career Years
  2. Family and Career Years
  3. Pre-Retirement Years
  4. Early Retirement Years
  5. Later Retirement Years

You might have noticed the word ‘retirement’ comes up in three of the five phases. Many people begin retirement financial planning during their family and career years. Some even get started during their early career years. Budgets are powerful financial tools. No matter what phase of life you are in, you can gain better control of your finances by starting a budget, refining your existing budget, and/or creating a new budget for the phase of life you are currently in.

The essentials of a home budget don’t really change as you progress through the phases. What changes are your fixed costs, discretionary costs, and priorities. Nabers Group provides this free Home Budget Calculator  to help you get started. You can use it to fine-tune your current budget, review possible budget scenarios, or build a new budget from the ground up.

What follows are important financial goals that financially astute people use to guide their home budgets in each phase of life.

Budgeting Your Working Years

Early Career Years is the time to establish good credit. This makes it so debts that you have or acquire maintain a low-interest rate. This is a time when many people are paying back student loans, buying cars on credit, and taking out a first mortgage. Good credit counts. It is also the time to learn to live within your means, which is a key attribute of a budget. Use this period in your life to establish good saving habits that will be needed to buy your first house. Even if you can’t yet save for retirement, this is the time to at least begin looking at retirement financial strategies. There are many strategies available, with a Solo 401k being among the best.

Family and Career Years is usually when your early savings pays off with a down payment on a home or the financial ability to move up to a bigger and better home. This is also the time to budget for life insurance and more savings. Now, the savings are often for your children’s college education. Of course, you can’t put off your retirement planning any longer. This is also a very good time to start your own business (even a very small business), which is the cornerstone of opening a Solo 401k.

Discretionary Spending

Budgeting Discretionary Spending often begins with something resembling the 50-20-30 Rule. Here is the breakdown:

  • Living expenses = 50%
  • Savings, retirement, and investments = 20%,
  • Discretionary spending = 30%.

Discretionary expenses are both recurring and non-recurring costs for non-essential items and services.  If your retirement finances are not where you want them in this phase of your life, it’s time to look at cutting back on discretionary spending and shifting more money towards retirement.

Ideally, as you approach your retirement years, you should be close to paying off your mortgage and all other debts. You should also have your retirement savings well underway.

Your Detailed Retirement Budgeting

Pre-retirement Years are the time to go over your finances with a fine toothed comb. Typically, a big assessment is whether you have enough savings to put your kids through college without taking out loans. New loans could hamper your ability to save for retirement as aggressively.

This is also the time to look at the tax structure you’ll have during your retirement years. The purpose of a Solo 401k is to defer taxes during your earning years so that it adds substantially to your compounding earnings for retirement. A Roth Solo 401k eliminates taxes paid on your retirement income.

This is still a good time to start a business if you haven’t already so that you can qualify for a Solo 401k or Roth Solo 401k. Even better is having a side business that you can continue in your early retirement years to provide a higher quality retirement life.

Your pre-retirement years are when to carefully review investments in your portfolio. Consider shifting your Solo 401k assets away from growth and more towards security.

Home Budget in Early Retirement Years

This is where some of the biggest changes in your budget happen. Your regular paycheck stops and you become fully dependent on your retirement savings. Perhaps you have a side business and possibly a pension if you are one of the few to be so fortunate. You might decide to begin collecting Social Security or wait a few years so that you receive a larger monthly payment. It’s the time for big budget decisions.

Don’t overlook that your health insurance coverage is likely to change significantly. Paying premiums could become a larger portion of your monthly budget. You may need health insurance coverage for your spouses and dependents. Medicare and Medicaid need to be considered. This is also a time to consider insurance for assisted or nursing care. Beginning coverage in your 60s is almost always less costly than waiting until your later retirement years.

Plan what to do with your free time. Early retirement is when fortunate retirees decide to travel the world or take up hobbies. Maybe you’ve dreamt of a sailboat or a second home in a sunny climate during the winters. Now is when your retirement savings become the funding source for your golden years. The important aspect is planning this part of your life so that your money lasts as long as your energy and health.

In early retirement, assess what your monthly costs are likely to be for the next 10 years or more. These include utilities, transportation, groceries, inflation, and taxes. If your financial planning has not worked out as desired, your retirement savings plus Social Security payments won’t cover future expenses. You might need to defer retirement.

Budgeting in Later Retirement Years

A lot can happen when you enter your late 70s and 80s. In some ways, your costs will probably go down. Your extended vacation in Europe is now a fond memory. Travel might be limited to visiting your children and other relatives where the cost no longer includes hotels and restaurants. However, this is the time when health and long-term care costs can become a bigger factor for your budget. COVID-19 has created some exceptions but generally, age 72 is when the mandatory minimum distribution begins for a 401k (70 ½ if you reached 70 ½ before January 1, 2020). Minimum distributions do not apply to Roth IRAs. If you don’t want to start minimum distributions, you may want to have a plan for converting your Solo 401k into a Roth IRA.

A Solo 401k, minimum distributions, and tax-free Roth distributions could mean you have more income during your later retirement years than you need. If all has gone well, your children are also doing well financially. All of your money is yours to spend in any way that you choose. This is also a time to revisit estate planning and your will.

A lifetime budget is a plan for prioritizing your spending. With a budget, you focus your money on the things that are most important to you. It progresses through phases such as getting out of debt, saving for a home, starting your own business, and retirement planning. Your budget creates a plan to keep you on track to be sure you enjoy all of the goals you have in life.

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