Independent Retirement Living: How to Manage Your Finances

Independent retirement living requires effective budgeting because you are existing on a fixed income. Once you retire, your ability to actively increase your salary is significantly reduced. This is the reason saving for retirement is critical. Savings, no matter how large, will fail to provide for your retirement if you do not budget them well. Try these tips for managing your finances on a fixed income.

Always Budget for Debt Payments

The most important feature of a budget, whether you are retired or still working, is accounting for payments toward debts. Many households think of their expenses only in terms of money they will allocate toward new items in a given month, such as dining, entertainment or luxury purchases. Always remember that your debts come first. As you near retirement you will ideally have fewer debts and lower debt payments. However, if you have a mortgage balance, medical bills or other expenses, these count as debts. Budget for these items first. Do not allocate money to new expenses until you have assured these bills are covered.

Avoid New Debts

Taking on new debts after retirement is a challenging feat. First, you cannot make back money on a failed investment. Second, you do not want to pass on debts to your benefactors. Finally, many lenders and financiers target the retirement community with bad loans. A primary example is the reverse mortgage industry. A reverse mortgage allows you to transform the equity you have in your home to cash. However, you have to pay that cash back at interest. This compromises an equity you may have spent a lifetime earning. If you pass away before the debt is repaid, your benefactors will be left with the bill. Further, instead of living cost-free in your retirement, you will essentially be assuming a large mortgage payment again. 

Plan for the Unexpected

When you are working, you can cover temporary unexpected payments by re-earning money allocated toward these costs. If you deplete an emergency fund, you can always rebuild it. When you deplete emergency cash after retirement, the only way to rebuild the fund is to cut expenses in the immediate future. This is undesirable for most retired individuals. The only way to prevent this situation, then, is to constantly be planning for the unexpected. Budget with an excess cushion each month. In a month you do not need this cushion, set it aside.

Track Cash Expenses

Cash expenses can be the downfall of an otherwise well-planned budget. There are two options to handle this: one, set a cash budget each month, determining in advance how much you can withdraw from the bank; two, track all cash expenses on a monthly basis. In the first model, you may even try the envelope system. This allows you to put funds for groceries, dinners out and other items into an envelope designated for that portion of your budget. Once this money is gone, you have exhausted that part of your budget for the month. In the second model, track cash expenses so you know where you can afford to cut back if need be.