How to budget (in retirement)

Way back in 1850 in his eighth novel, David Copperfield, Charles Dickens’ character Mr Micawber revealed the secret to happiness:

Annual income twenty pounds, annual expenditure nineteen (pounds) nineteen (shillings) and six (pence), result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

In other words, spend less than you earn. So creating and sticking to a budget in retirement follows Mr Micawber’s golden rule to ensure you have financial peace of mind.

If you are starting to feel uncomfortable, that’s perfectly natural, as we’ve just pressed two of the most sensitive buttons: fear and guilt. Fear that you really will run out of money. And guilt because deep down inside you know you are spending beyond your means. And perhaps further fear that this behaviour, if not checked, will lead to financial hardship.

The good news is that you can change this behaviour by adopting the following strategies and sticking to them for one month. By then you will, hopefully, have proven to yourself that there is a better way of managing your money and, since you’ll be so relieved, you’ll stick to your new-found path of frugality.

So how do you turn things around? By reversing your thinking on the best way to spend less. Most of us have been told that this involves having a clear idea of what we spend – daily, weekly, monthly – and adding it up and making an arbitrary cut that matches our income. Wrong! If you’ll excuse the language, this is arse up. 

The best way to create a budget is to automatically allocate 10 per cent of your income to a savings account, then consider how the remaining 90 per cent can be apportioned to cover your nonnegotiable recurring household expenses. Deduct this amount from the 90 per cent and what you are left with is what you actually have to cover your discretionary expenditure.

For example, let’s say you are on a part Age Pension, supplemented by an income stream from retirement savings, and as a single you receive $30,000 per annum, or near the lower end of what ASFA deems ‘comfortable’. So, a total of $3000 per annum, in regular deductions, will be automatically transferred to a savings or rainy-day account. Let’s then take a total of $17,452 to cover essential household items from the remaining $27,000, which will leave a balance of $9548. In the ASFA table, essential household items include spending on housing, energy, food, telecommunication, car and public transport costs, health insurance, and medical expenses.

So the remaining $9548 is your discretionary budget, which means you can decide which items you will retain, which you will remove and which might be reduced. ASFA projections suggest that $6281 will cover modest expenditure on clubs, DVDs, alcohol, dining out, cinema and domestic vacations. The decision to create a budget for this discretionary spending is key to emulating Mr Micawber’s advice in order to come up with the six-pence happiness indicator.

Of course, not many of us work with an annual budget, so dividing the amount by 12 will give you a monthly budget which, if adhered to, will enable you to achieve regular savings and remove financial stress. But from day one to day 31, you may be tempted to spend more, so how can you manage this? By clever pre-determined and automated online banking transfers, and even cannier credit-card management.

To do this, create a series of bank accounts and transfers:

  • bank account A receives your salary/income, as previously mentioned

  • bank account B, which is a term deposit and cannot be accessed, receives an automated deduction of 10 per cent of your salary/income (say $250 per month)

  • bank account C receives an automatic deduction of $1454 to pay for non-negotiable household expenses. It is from this account you will set up automatic deductions to pay your essential energy, insurance and telecom bills, as well as rates, a day before the due date. A realistic amount for food should also be included. (Note: we are not using a credit card. Yes, your points will suffer, but your peace of mind will increase exponentially.)

  • bank account D (your discretionary spending account) will receive the last auto transfer from bank account A – i.e. the remaining $796. This is the deal breaker. You can spend no more than the deposited balance per month. So take your credit card, place it in a plastic bag and put it in the freezer. Yes, the freezer!


Now you can use a debit card linked to bank account D to pay for the fun things in life. Movies, clothes, hairdresser, local travel, gifts, books and outings are all paid for from this pot of money. And if it runs out, guess what? You go without until next payday at the beginning of the next month. And there is no point in crying poor, especially if your housing, utilities, food and transport are already covered from bank account A. And no, don’t even think of digging into the savings in bank account B. That’s not an option. So this system leaves you with nowhere to run and nowhere to hide, but offers a very achievable financial management plan. What’s not to like about that?

And at the end of one year, the savings account (bank account B) can be used for one of four things:

  1. pay down any existing debt
  2. gifted or loaned to nearest and dearest
  3. much-needed renovations on your home
  4. some exciting bucket-list travel options.


Yes, you may need to add a little extra for big items such as rates, depending upon the month in which you start.

A cautionary note: If, like me, you are used to maxing out the credit card, then desperately working out how to cover the monthly bill, this system is guaranteed to mess with your mind. But the upside is far better than the short-term discomfort. Why don’t you try it and see?

Related articles:
Budget affects retiree spending
Save with these budgeting apps
Money habits for happy couples

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