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Creating a budget or spending plan can sometimes get a bad reputation for feeling too restrictive. Admittedly, budgets are not one-size-fits-all and using the wrong method for your circumstances can result in feeling exhausted and limited. However, there is a huge benefit to tracking how much of your money gets spent — especially if you hope to retire by age 65 or sooner.
Tracking your expenses is one of the most important steps for figuring out your “retirement number” (a.k.a., how much money you need to have saved or invested before you can enter retirement). This is because once you’re retired, you’ll need to know how much money you should be spending each year to ensure that your savings and investments will keep you afloat for the rest of your life.
Remember, the idea is that once you enter retirement, you won’t be working so all the money you invested can be withdrawn each year and used as “income.”
The amount of money you’ll withdraw each year will be different for everyone, and will depend on a number of factors such as, where you live, how much you’ll pay in rent or mortgage and the type of lifestyle you want to have in retirement. Traveling several times a year will mean spending more money compared to only spending time in your own backyard and taking up an inexpensive hobby or volunteer work.
You can look to your current lifestyle and interests — and thus, your current level of spending — for some clues as to about how much money you’re likely to spend each year in retirement. For example, if you travel a lot now and want to keep traveling around in retirement, this should be taken into consideration.
Keep in mind that your current level of spending likely won’t be an exact match for how much you’ll spend in your golden years, since some costs are likely to be lower or higher in retirement. For instance, you might spend more on healthcare later on than you do now. However, maybe your housing costs will be lower in retirement than they’re now if you plan to pay off your home by then. Still, though, your current expenses can be a solid starting point.
If you’ve already been budgeting, simply refer back to each month’s budget. Look at your total spend for each month and add up all the numbers — you’ll then see exactly how much money you’ve spent in a year. But if …….