There is often a negative connotation associated with the word “budgeting,” since it may conjure up images of an accountant warning his or her client to forgo much-desired vacations, trade-in a beloved BMW for a more “practical” car, and/or cancel home remodeling plans, which “would have meant a great deal to the family.” Very few people enjoy the realities of adjusting their spending/saving habits, and almost nobody cares to admit he or she has erred in the realm of money management.
On the other side of the coin, there is often great interest in investing and earning profits via stocks and bonds (or other investment vehicles). This is not only part of the American Dream, but it is widely considered a sophisticated proclivity, to be explored via exciting personal research.
However, experts stress that proper budgeting/cash flow will allow one to put more money toward traditional investing, provide peace of mind, and help turn dreams (at least those that can be purchased) into reality.
Budgeting/cash flow issues affect not only low-income and middle-income people and families, but high-income earners as well. Financial professionals interviewed by New Jersey Business magazine report that people annually earning $500,000, for example, often manage to annually spend $600,000.
Christopher Lieto, senior manager in the tax group at WeizerMazars, says, “I think the best quote would be ‘bigger toys for bigger boys.’ That is not meant to be sexist, but I have had experiences with clients – mostly attorneys, for whatever reason – when everything is based off cash. They are leveraged to the hilt, and if a case goes the wrong way, or a client doesn’t pay, then all of a sudden there is a huge cash issue.”
Strategies for the Successful
What saving/spending strategies are appropriate for professionals who have successfully navigated the realms of business, medical professions or other esteemed careers? The answers are often complex, since professionals typically have multiple income sources, as well a complex array of expenses ranging from children’s college tuitions and property taxes, to more banal concerns such as purchasing groceries for the entire family or dining with friends.
Speaking broadly about persons of all income levels, including top earners, Kathleen M. Clayton, principal at The Spire Group, says, “We met with this husband and wife who are living together, and they have known each other forever and a day, but they had totally different answers for ‘How much are you spending for rent?’ and ‘How much are you spending on utilities?’ They didn’t even know what reality was. That’s a huge thing; you have to know what you are spending your money on. Also, where does [the money] come from?
“Then, when we talk about financial planning, I try to frame it as not so much as being on a ‘budget,’ but instead put a positive spin on it and say: ‘Let’s identify what your goals are for the future.’ And [the client] might say, ‘OK. I am saving for a house,’ or, ‘I am saving for retirement.’ Whatever the goal is, the key [aspect] to talk to them about is: “You need to prioritize your needs, such as ‘I need a roof over my head, and I need food on the table’, versus your wants, and place those things in two different buckets.”
Determining one’s expenses and income can be accomplished via old-fashioned – yet highly effective – tiny notebooks that family spenders carry in their pockets, and in which all expenses and incomes – both large and small – are recorded. This can be used in conjunction with an Excel spreadsheet. A more modern approach may utilize various smartphone budgeting apps or desktop/online computer software programs.
Robert H. Doherty, New Jersey state president, Bank of America, tells New Jersey Business, “With the changes in technology that have been occurring, there’s a lot more information that is available to consumers, right now. For example, if you pay your bills through bill pay online, you can actually download your last 12 months’ worth of payments that you have made, and you can sort them into different categories. If you combine that with your credit card statements – and what you are keeping track of for your cash statements – you have your spending habits for the whole year, in one place, and relatively at your fingertips. Utilizing this technology can be very helpful.”
That said, WeizerMazars’ Lieto opines, “[Tracking expenses and income] doesn’t even have to be computerized. It could be pen and paper. I mean, God forbid, we are saying we are back in the Stone Age, but there is something to be said, sometimes, for just putting pen to paper and thrashing it out.”
The Spire Group’s Clayton says, “Whether it is a piece of paper or an app, people don’t realize how much random spending they do, personally. They know they spend $1,800 on rent and $200 for utilities. But, when they start adding up all their lattes, bagel runs, and their stops every day for lunches, it kind of blows them away: ‘Oh, my God. Look at how much I am spending that is more for my wants than my needs.’”
She adds, “You need to plan into your budget some of the things that are important to you, other than your really long-term goals. We also explain to our clients that there are things they should not eliminate from their budgets, simply to save money. These days, that includes health insurance. There are other things that they cannot cut. Obviously, they can’t cut their debt payments. You may be able to restructure them, combine them, or refinance them, but they can’t not make them.”
Emotional Aspects
As corporations increasingly comprehend how to entice consumers to purchase their goods and services via extremely targeted and effective advertising techniques, even highly intelligent people are often drawn toward purchasing items that they don’t truly desire or need, and are outside their budgets. Moreover, a $460 dress blazer can “painlessly” be purchased online with a credit card, but if one were to visit a department store and count out $460 in $20 bills for this “shaped fabric,” he or she might immediately detect that the “bargain” was amiss.
Separately, it has been researched that childhood experiences can result in various maladaptive money habits, ranging from either miserly saving money at one end of the spectrum, to unnecessarily purchasing goods and services in order to compensate for a variety of emotional concerns, at the other, for example.
It may be difficult enough for individuals to overcome such obstacles, but they can present enormous difficulties for couples, when an otherwise wonderful spouse has spending/saving habits which are incongruent with his or her partner’s habits/philosophies. In these surprisingly common cases, other professionals (not accountants, financial planners, etc.) should likely be consulted.
The Broader Picture
Overall, budgeting/cash flow is obviously a means toward greater ends. As Christopher J. Lester, president of Professional Planning Services, says, “I don’t tell clients that what they are doing is right or wrong; I just collect data. Then I say, ‘Now that we have the data, this is a snapshot in time of what your [future] could look like, based on the information you provided for us.’ [Then I ask myself], ‘Do I see anything that jumps out at me as being concerns? Are they making assumptions that are unrealistic, or not likely? Are they taking more risk than they should be taking?’ … One of our responsibilities is to help educate a client. I help them to see what I see, and do it in a nice way, by saying, ‘Listen, you are going to do pretty well. But, the difference could be whether or not we have enough money at age 90, or at age 100, or whether you leave a legacy to a charity of your choice, or to children and grandchildren.’
“It all boils down to budgeting: What do you want to have? What is the lifestyle you want to live when you get to the point when you say, ‘I am retired.’? … Entering retirement is like going on unemployment for the next 20 to 30 years. That last pay check that you get from your employer is it. So, everything that you either accumulated, saved or spent – and the decisions you have made for the last 20 to 30 years – got you to that point. However, the decisions you make now will have an impact on your lifestyle for the next 20 to 30 years.
“Most advisors have done a pretty good job of educating consumers on the accumulation phase. I am an expert on the distribution phase. We take into consideration the client’s budget, what expenses are likely to be there, what expenses are likely to go away, and what expenses are likely to increase, going forward.”
Lester concludes, “The budgeting component is often a neglected or almost an ostrich-based, head-in-the-sand attitude: ‘Let’s not think about it; we’ll worry about it later.’ Then – all of a sudden – it is upon somebody.”
Conclusion
Saving more than one spends is the key to successful budgeting, and, all told, it is paradoxically “that simple, yet that complex.” Financial professionals, combined with personal discipline and organization, can facilitate a lifetime of healthy money habits, and help result in peace of mind (at least in the financial sphere of one’s life).
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