Budgeting: Blending, Not Balancing

Nothing makes someone’s eyes glaze over faster than talking about “budgeting”. What about the “b-word” makes us squirm? We all understand the math involved, and surely the difficulty isn’t an inability to identify the components of spending. Perhaps, then, it’s all about perspective. Budgeting can create anxiousness because it challenges us to think of our fixed expenses and discretionary expenses in terms of static “wants” vs “needs”. What if instead, we viewed budgeting as a dynamic process of prioritization that can empower us to make educated life decisions and make progress toward our goals.

In this piece, we offer a different perspective on budgeting and share budgeting applications for various stages of life.

Imagine you have been incredibly inspired to follow your passion to establish an entity/organization. You spend years refining your mission and vision statements, and your efforts have been rewarded by steady growth. During times of prosperity and economic downturn, you are constantly evaluating choices by their financial impact and their alignment with your vision and values. When things are going well, you might offer additional bonuses, increase your philanthropic efforts, or increase research and development investment. Conversely, poor economic conditions may require you to pause or completely eliminate some initiatives based upon the merits of “necessity” in accomplishing a goal. For example, it probably wouldn’t match firm values for a biotech company, concentrated on curing a specific type of cancer, to significantly reduce the R&D budget when met with financial difficulty. Instead the firm may temporarily reduce or eliminate particular fringe benefits (i.e. transportation subsidies for employees, reimbursable steak dinners, large executive bonuses, etc.) depending on how closely those benefits align with the vision.

Now, let’s keep this example in mind and apply it to your personal finances. Much like an organization that has fixed overhead costs, you likely have a list of fixed expenses like rent/mortgage payments, insurance premiums, and food expenses – all necessary for you to accomplish what you set out to do. Discretionary expenses, analogous to the fringe benefits mentioned in the example, may increase or change completely as new opportunities become available with an increase in free cash flows.

So, how can we be confident in prioritizing these scarce resources? We believe that monitoring your financial plan, having grounded cash flow policies, and continually returning to your Live Big^® Map can help bring the bigger picture into focus and keep your budget on track. It’s also important to remember that prioritization looks different for different stages of life.

Accumulating Clients:

The blessing of accumulation is the amount of control over the dials of time until retirement, saving rate, and spending. Within the context of practicing good financial hygiene, the ability to manage the ratio of fixed expenses and discretionary expenses is a major driver in our ability to overcome obstacles. Our cash flow policies offer a scalable model for an additional layer of accountability. Beyond that, further discussion may be beneficial in determining how to re-chart the course to ensure we are still on track.

Spending Clients:

Ignoring the source of funds for spending clients (investment account instead of wages/salary), spending clients should be making decisions using the same criteria as accumulating clients. The key difference is that most of the control over future outcomes weighs more heavily on the spending dial. Since it can be more difficult to find and initiate another form of cash flow within retirement, the resilience of your financial plan is directly impacted by the percent of discretionary expenses within the budget. It is also much less stressful to respond to a $500 reduction in monthly income when the majority of your cash flow isn’t spent before it is received.

We hope that this piece has encouraged some dialogue with respect to how budgeting can be approached. If you have any questions about opportunities or would like additional guidance with our financial planning policies, please do not hesitate to contact us!