One of the scariest aspects of retirement is the change in fortnightly income. Massey University research shows that no matter where you live or how frugal you are, NZ Superannuation is just not enough to live on. It certainly helps if you are living in a rural area rather than a city, and it is critical to own a debt-free home, but the key to living well in retirement is to manage your living expenses in a very disciplined way.
Money spent on living expenses – food, power, phone etc. – is money that is not then available to spend on the fun things that make retirement enjoyable. The lower you can drive down your living expenses, the more you will have to spend on the things that really matter to you.
We have around two years of higher than usual inflation ahead of us, which will make budgeting even more important.
The problem with most budgets is that they don’t work. There are several good reasons why. To start with, they require a lot of time and effort to put together, especially if they are detailed. Next comes the difficulty of tracking actual income and expenditure against the budget. This requires either a very large spreadsheet and a lot of data entry, or software that takes bank account transactions and sorts them by budget category. All this is very time-consuming.
Perhaps the biggest problem with budgets is they don’t change behaviour. They are usually constructed using previous patterns of expenditure as the starting point, so these patterns become entrenched. There is often very little correlation between budgets and goals. The approach is ‘bottom up’ with the focus on making sure the expense items, when added together, come to a sum that is less than income, rather than a ‘top down’ approach beginning with long-term goals. The incentive to change short-term behaviour in order to achieve long-term goals is therefore lost or diminished.