Chapter 4. Create a Budget

In mid-2009, I received an e-mail from a couple seeking a portfolio makeover in my newsletter, Morningstar PracticalFinance. They were in their mid-fifties, and they had seen their investment portfolio shrink by nearly half during the bear market of 2008. That, in turn, had scuttled their hopes for retirement in less than a decade, and they were wondering how they could make up the lost ground.

This couple's investment portfolio, with more than 80 percent in stocks, was clearly too aggressive given their life stage. In talking with them about their finances, however, I discovered that their investments weren't their main problem. Their spending was.

The couple had scrimped and saved to buy a carpet-cleaning business in the early 1990s and went through some lean years while they were building up their clientele. Thanks to their sacrifices and hard work, the business was generating more than $200,000 in take-home income for them per year.

As is so often the case, however, this couple's spending went up right along with their pay, and their savings slowed to a trickle. They bought a bigger home, took regular trips to Las Vegas, and were in the habit of spending money on nearly anything they wanted, from flat-screen TVs to catered family parties.

When I asked them if they had a budget, they said that they once had. While they were buying and building up their business, they even lived in a two-bedroom apartment with their two children. But after their income had ...

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