Almost without exception, the family budget changes after a spouse dies. Not only will your income likely be affected but your expenses probably will too.
If your household had a spending plan that was operating smoothly, you already have a framework from which to work. A few tweaks may be all it takes to keep your family’s financial ship on course.
However, if you find yourself creating a budget for the first time, you might find the process a bit overwhelming. In that case, use these five steps.
Step 1: Evaluate your income.
Before you can decide how to spend your money, you need to know how much is coming in. Widows commonly have income from the following sources:
• Social Security Survivor or Retirement Benefits
• Life Insurance
Ideally, life insurance benefits should be invested and then pulled out slowly – 4 percent each year is a common recommendation – to replace your husband’s income. That isn’t always possible, and life insurance benefits may not be enough to make up for losing your husband’s paycheck. Talk to a financial advisor about the best way to use life insurance or other lump sum payment you receive after your husband’s death.
Step 2: Record your expenses.
Now, you need to figure how much your household currently spends each month. If you already have a working budget, you can simply pull the numbers from there. If not, go through old bank statements to get an idea of how much money your family has been spending on basic categories.
You’ll, of course, want to list monthly expenses such as mortgage payments, utilities, fuel and groceries. But don’t forget all those other expenses that may not occur monthly but still add up over the course of the year. These include items such as:
• License renewals
• Kids’ activities such as camps and sports
• Seasonal expenses such as lawn care and snow plowing
• Gifts for Christmas and birthdays
Add up how much you expect to spend each year for all these irregular items and then divide by 12. Plan to put this amount aside in a savings account each month so you’ll have enough to pay these bills when they come due.
A note about your husband’s debt: If your husband died and had debt that was in his name alone, that debt dies with him. You don’t inherit it unless your name was on the bill too. However, your husband’s estate may be responsible for paying off the debt. A financial advisor or estate attorney can help you determine how these bills are to be handled.
Step 3: Reconcile any shortage.
This is the hardest part of the budgeting process. Unless you were the breadwinner in your family or your husband had a large life insurance policy, there’s a good chance your new income will not be enough to cover your existing expenses. That means you now have to figure out how to close the gap between the two figures.
Start by eliminating any expense that is irrelevant now that your husband is gone. Subtract out the fuel for his commute, the cost of his clothing and any other personal expenses he may have had. Then, you need to start cutting the budget in other places.
Here are some ideas from those that are relatively painless to those which would require a major life change.
• Eliminate eating out
• Reduce your grocery budget
• Drop cable
• Compare insurance prices for cheaper coverage
• Look for less expensive mobile phone service
• Sell your husband’s car
• Move to a cheaper location
No one wants to move from their home after a spouse dies, but sometimes drastic measures are needed to make ends meet. If you still can’t balance the two numbers, you may need to think about what you can do to boost your income, whether than means getting a new job or selling items on eBay.
Step 4: Assign every dollar a purpose.
At this point, your numbers should equal one another or, even better, your income will exceed your expenses.
The next step is to assign a purpose to every dollar. This is what is known as a zero sum budget. When you are all done, you should know where all your money is going, and you should NOT have any left over. You can’t use a miscellaneous category to dump all the extra into either.
Why do you need to assign every dollar a purpose? It helps you avoid making impulse purchases. It’s easy to think you have an extra $100 in the bank so it’s ok to spend a little more. Then, three lattes, one movie and a pair of shoes later, you’ve found you’ve spent twice as much and thrown off your entire budget. Knowing you have a certain amount to spend on each budget category can help keep you in check.
If you do find yourself in the enviable position of having extra money and not knowing what to do with it, go ahead and mark it for savings. You can never go wrong by padding your savings account. Or revisit your irregular expenses and see if you want to put extra aside for those. You may also want to consider using some of that money to open a personal retirement account or a college savings account for your kids, if you have them.
Step 5: Revisit the numbers on a regular basis
Perhaps the most overlooked step in budgeting is this one. Creating a budget isn’t a one-time event. You can’t create it, walk away and expect it to work flawlessly year after year.
After three months, go back and compare what you actually spent to the budgeted amount. If you have $400 in the grocery category but you regularly spend $500, it’s a good idea to bump up that category and cut $100 from somewhere else. Being honest with yourself about how much you spend in various categories is key to making a budget work.
Then, you need to revisit your budget annually or every time your expenses or income change significantly.