Taking Care of Mom and Dad: Analyze Spending Patterns
Once you've balanced their records, you can begin to characterize the ways they spend their money. Go back through the list of red expenses and give each expense one of the following numeric codes:
1 -- Shelter. This includes rent on their apartment, mortgages on their home. Insurance. Repairs and maintenance. Utilities. No taxes -- those go in a separate category.
2 -- Health. This includes health insurance premiums, if they pay them themselves. It also includes copayments or deductibles that they pay out of pocket, money they spend on drugs -- prescription or not, and expenses for seeing chiropractors, therapists or anyone else who tends to their well-being. And any medical equipment they buy.
3 -- Food. This includes groceries and kitchen-related expenses like water service, etc. This should not include the costs of eating out, though some people count prepared food they bring home.
4 -- Transportation. This includes car payments, car insurance, gasoline, repairs and maintenance. Also, other related expenses: Bus fare, the chauffeur's salary, etc.
5 -- Clothes. Everything that they wear -- whether functional or outrageous -- goes here: work clothes, weekend clothes, funky thrift-shop coats, Armani tuxedoes, Nikes. Most jewelry. Dry cleaning and tailoring.
6 -- Education. This includes the costs of your children's education, if your parents help make payments. Also, anything they spend on classes that they take.
7 -- Recreation. This will be the first of several broad categories. It should include things like health or country club memberships, athletic equipment, hobby supplies, collections, etc. Most people who use this system include travel and vacation expenses in this category.
8 -- Entertainment. This includes eating in restaurants; drinks with friends; concerts, plays, sporting events or movies; movies they rent, books, magazines or newspapers they buy. It also includes gourmet coffee, lunches, online computer services or memberships, etc.
9 -- Taxes. This includes everything they pay directly to the federal, state or local governments. Include income taxes withheld from paychecks or distributions. Also include property taxes that are escrowed (that is, included) in any mortgage payments. Leave out sales tax for this exercise.
10 -- Communication. This includes their home phone bill and -- importantly -- any cell phone bills. Also, you probably should include things like home DSL lines and/or Internet service fees, answering services, if they use them, pagers, phone hardware, etc.
11 -- Religious and charitable donations. This may include cash contributions and prorated commitments (for example: one-twelfth of an annual gift that they've promised). The prorated commitment may be a little tough to calculate; keep it to actual pledges that they've made. Usually churches or charities will send you some kind of paperwork describing the commitment.
12 -- Interest and finance charges. This includes interest on consumer debt -- credit cards and the like. It should also include bank fees charged to their account and finance charges for things like cash advances, overdraft protection and specialized transactions. It includes late fees for tardy payments. You don't need to include interest on things like mortgages or margin loans...though some people do.
You may feel that particular expenses deserve their own categories, or that these 12 categories don't do justice to their complicated life. But the purpose of this exercise is to make basic conclusions about where money goes. Most retired people spend roughly:
- 25 to 30 percent of their net income on shelter;
- 25 to 30 percent on medicine and health;
- 10 to 15 percent on food;
- 10 to 15 percent on transportation;
- 5 to 10 percent on entertainment;
- 5 to 10 percent on recreation;
- 5 to 10 percent on clothes;
- 5 to 10 percent on education and daycare;
- less than 5 percent on taxes;
- less than 5 percent on communication;
- less than 5 percent on charitable donations; and
- less than 5 percent on finance charges.
Use this list as a guide or to indicate trouble areas. If one item is way out of range, it may be a problem. Pay particular attention to the items near the bottom of the list. The expense categories that surprise more people are communications, entertainment and interest/finance charges. If any of these are more than 10 percent of your monthly spending, you probably need to cut back.
This exercise isn't intended for people with urgent money problems. Make gradual, lasting adjustments rather than radical change.
