Retirement Budgeting

Retirement savings are one element that you should budget for. But here we focus on the use of savings as a tool to living on a budget. The kind of savings we're talking about never grow long term. They are simply used to smooth out the bumps in your annual budget cycle. Is there a right way and a wrong way to use credit cards and checking accounts? Credit cards can be death, and every budgeting book talks about the dangers of overusing credit and credit cards. Sorry, we will, too. But credit cards, while often the most expensive way to pay for something, are sometimes the best way to manage certain family expenses.

Our goal is getting savings and spending mechanisms in place. Let's talk about four types of savings, or personal “funds”: income reserve fund, “must” fund, contingency fund, and leisure or “want” fund. These savings pigeonholes can be separate savings accounts or can be grouped for simplicity, or they can be envelopes of cash in your medicine cabinet!

4 Types of Retirement Funds

Income Reserve Fund - For those of you whose income is irregular, we recommend a carefully managed, highly visible savings (or investment) account to park your funds during the high times of your income cycle—“ park” so you have funds you need during financially dry times, and “visible” so you can carefully manage and plan your future. Avoided at all costs the temptation to go out and spend that commission check the same month you get it. For those of you who own small businesses, a practical way to save your income is simply to keep it in your business. Only draw what you need when you need it, and keep track of the owner's equity account as though it were a savings account.

Obligation “Must” Fund - This is temporary text placed by the designer, remove and replace with your own. This is temporary text placed by the designer, remove and replace with your own. This is temporary text placed by the designer, remove and replace with your own. This is temporary text placed by the designer, remove and replace with your own. This is temporary text placed by the designer, remove and replace with your own. This is temporary text placed by the designer, remove and replace with your own.

Contingency "Rainy-Day" Fund - Car repairs, medical expenses, and fixing that leaky roof are examples of the myriad budget busters that can happen during the year. Nobody is immune from these events; it's all part of life as usual. What you should do, however, is set aside part of your income into a special contingency fund to handle these emergencies. We recognize that it's hard to plan for all of them, but looking at your past financial record should help. Again, you get extra credit if you have this money taken off the top and automatically set aside.

Leisure “want” Fund - Sounds like retirement, eh? Well, not quite. We recognize that everyone needs to relax, take vacations, and spend a little time and money on recharging the batteries. The right way to do so is to set up yet another account that you pay into each month. If you don't, we know what happens. You decide you need the vacation anyway, and out comes the MasterCard (we've seen the commercials, too). You consume today, and your suntan fades before the first payment is due. Now it takes a year or more to pay the thing off, with interest in the hundreds of dollars. Think of the nice dinners you could have bought with the interest savings (and interest earned) if you'd only set it aside in advance! As a practical matter, this savings can be combined with one of your other accounts. But for starters especially, it's probably a good idea to set it up separately.

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