As Detroit, Michigan, continues its Chapter 9 bankruptcy process, retired City of Detroit pensioners are still learning about the fate of their monthly pension payments.
City employees with pensions, and all retirees, need to have a plan in place, in case their monthly income is reduced. Anyone who is in a difficult financial situation, not just Detroit pension holders, will benefit from looking at their income and expenses.
Some steps to consider:
Set Up a Budget – Many people think if they have money in their account at the end of the month, they are doing okay. While this may work in some cases, individuals who may see a drastic cut in their monthly income will need to prepare ahead to make sure their expenses are covered.
A simple way to build a budget is list all income (pension, part-time work, etc.). Then, list all your major expenses (mortgage, car payment, insurance premiums and utilities, etc.) and subtract from your net income. From there, track other expenses, like groceries, gasoline and credit cards.
Maintain Your Budget – Years ago, at GreenPath, we taught our clients to allot cash each month in an envelope system, where you would put cash in an envelope for a certain expense. Today, we teach the envelope system as a budgeting concept with the basic premise that you only spend what has been allotted, and once it’s gone, you stop spending. Try to maintain each monthly allotment without borrowing from other “envelopes.”
Track your Expenses – Tracking expenses is a key aspect of maintaining the budget that you have created. If you do not track your expenses, there is no way of knowing whether you are staying within the budget you have established. The most basic tracking method involves writing down all of your expenses in a notebook every day. Another tracking technique involves saving receipts for purchases and documenting that information in a notebook or on your computer or smartphone app.
Have the Talk – Communication is key when it comes to personal finance. Individuals should sit down with their spouse and family and have an honest discussion about money. Some view money as something they should spend freely each month, while someone else looks at money as something that needs to be saved. Retirees need to talk now about what steps they will take today, in case their income is drastically reduced in the future.
Common Mistakes to Avoid – While credit cards are convenient, you must pay them off in full each month in order to avoid heavy interest fees that will cause your budget to falter. Other mistakes include not tracking your expenses, borrowing from one category to fund another and putting yourself in tempting situations, like splurging on a vacation to get away from it all, when you don’t have the funds to finance the trip.
Ask for Help – GreenPath offers free debt counseling and coaching sessions, in-person, over the phone or Internet, with no obligation. We work with thousands of people each year in helping them build a budget and a work plan to prepare for the future. A GreenPath counselor will thoroughly assess household income and expenses, find places to save, and develop a customized budget and action plan for achieving personal finance goals.