Do you like to travel? Do you ever wonder—can we afford such-and-such a trip? Or think—if we go on this holiday, will we bust our budget for the year? My wife and I love to travel, and now many travel companies send us their colorful travel brochures almost every day. Some of the itineraries look spectacular. So, the other day, my wife and I were discussing future trips and I said—“let’s go!” The trip I wanted was quite expensive. “We can’t afford that,” she said. “Yes we can,” I said. Our conversation went back and forth. This was really a question of numbers. I decided to look at our budget and figure it out.
In my financial planning practice, I use a three-tier process for helping my clients build a budget. Each budget includes three different levels of expenses. I call the budgets “minimal”, “better”, and “dream.”
In brief, here is how the budgeting process works. You first estimate how much you spend on core expenses, such as food, shelter, clothing, healthcare, transportation, and taxes. In my case, I used actual numbers over a few years that I had entered in Quicken, a low-cost computer program for tracking expenses. I estimated what our other expenses are for categories such as travel, eating out and other recreation, home improvement, charity, gifting to family members, and others.
Then I built three budgets from the expenses. In our situation the largest elective expenses in the three budgets are different levels of travel and charitable contributions, but you may have different categories that are important for you.
Next I listed our sources of income. For us, we have pensions, annuities, Social Security, and investment income. Because I was working on a post-retirement budget, I did not include earned income. I calculated the income from investments at 3%. (For a fuller discussion of maximizing income from investments, see my White Paper on the home page of my website.)
Matching up income with expenses, I knew that the “better” but not the “dream” budget was the most appropriate for us. And here was the critical step – I reviewed each of the numbers with my wife. If she disagreed with any of my estimates, I further researched them until we were in agreement. If we disagreed, I chose the higher estimated expenses and lower estimated income.
When I was done, we had a budget that makes sense and is based on our actual financial situation. We leave on a trip in a week to escape the cold Minnesota weather for a couple of weeks.
In coming months, I’ll be addressing various ways to get our “ducks in a row”—balancing our finances and our dreams.