Saturday, March 1, 2014

Budgeting Tools

One of the most important skills a recent or soon-to-be retiree must master is budgeting. First you have to determine how much income you can reasonably count on after you stop working full time. Then you have to figure out how you will spend it. Alternately, you can decide what you need (or want) to spend in retirement, and then wrack your brain over where the heck that amount of money will come from. Which generally leads to rethinking how much you really need to spend.

There are many books and websites to help with this planning. But few of them provide tools to help you sequester your funds into the categories you’ve identified in your retirement budget. A commercial from the financial services company ING offers an unusual suggestion. Money earmarked for retirement is colored orange (the same as ING’s logo). That doesn’t seem practical. Plus U.S. Code Title 18 Section 333 tells us it’s illegal to deface U.S. currency.

Specifically: “Whoever mutilates,… disfigures, or… does any other thing to any bank bill… issued by… the Federal Reserve System, with intent to render such… unfit to be reissued, shall be fined… or imprisoned not more than six months, or both.” There’s room for interpretation about what rendering money “unfit to be reissued” means, but I don’t think Uncle Sam would look kindly on dying our money orange.

That left me pondering other tools to help retirees set aside income earmarked for specific expenses. I’m reminded of something from my childhood. When I was 3, we moved from a suburb of Newark, New Jersey to live year round in the summer cottage my father had built in northern Jersey. He winterized it gradually and for years we had a potbellied stove in the living room to provide extra heat.

At the time, my father’s method of budgeting was manila envelopes. Every payday, he put cash into “files” labeled mortgage, groceries, oil, etc. The stove was still with us in the early 1950’s when he finally opened a checking account. The Federal Reserve Bank of Atlanta’s website tells us: “Checking accounts in the United States almost doubled between 1939 and 1952,” so my father was a late adopter. The FRBA site credits the growth after 1952 to the advent of MICR (Magnetic Ink Character Recognition).

MICR not withstanding, I’m not sure what led to the switch from cash to checks in our household. We lived in God’s country, with just a Catholic Church and a bar (the neighborhood essentials) in our hamlet. My father commuted to work by car about three hours a day round trip. Perhaps a bank branch with convenient hours opened en route. What I do know is that, once he had the checking account, he ceremoniously burned the now-obsolete manila envelopes in the potbelly.

I must have been around 7 then and I was thrilled to be allowed to help out. My father retrieved any important contents from the envelopes and gave the empties to me to bundle for him to burn. Imagine my excitement when I discovered a five-dollar bill still inside one! I didn’t get to keep the money, but I never forgot the “attaboy” from my father. (He did not bestow praise gratuitously.)

Looking back, I realize my mother was probably behind the switch to checking. She might have had her eye on one of those toasters that banks gave out in the early fifties for newly opened accounts. More likely she decided she wanted to free up space in the living room, because the stove disappeared soon after the burning ritual.

This brings me to some tools for sequestering money into budgeted slots. One solution (an improved version of my father’s manila envelopes) is to put the cash into see-thru Ziploc bags marked for each item. You can also use empty pill bottles. Match the vitamin letter to the budget category: E for electric, C for cell phone, Multi for mortgage. Or prescriptions: Hydrocodone for house repairs, Lipitor for lawn care, Plavix for physicians. You get the idea.

I especially like the Sock Solution, because it takes care of another problem: mismatched socks. The ones whose mate disappeared, but the minute you throw it out, the lost one will show up. Stuff your cash into socks labeled for each budget category. Knot the ends and stow them in a drawer marked “Budget.”

Alternately, open new checking accounts earmarked just for each specific need. (Good luck keeping them straight.) The bank might even give you a thermal mug. Or a polar fleece blanket. But don’t expect a toaster.

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