Cash Flow – The “B” Word

For many individuals, families, and even companies, the infamous “B” word causes undo stress, and anxiety, and at times, can even lead to arguments. As we look at our financial goals, many lists reference this “B” word as something they hope to achieve or implement. Today we will discuss the core of cash flow planning… BUDGETING!

Budgeting is one of our favorite topics to discuss.  It is one of the few items we have complete control over in our financial lives.  That said,  most do not feel this way.  Some completely disengage at the simple sound of the word.  Rarely is anyone excited to discuss budgeting because it has such as negative connotation and most hear “stop spending money!” at the beginning of the topic.  Let’s remedy this stigma below by explaining how a budget can work and how it can actually simplify your finances.

First, let’s discuss what we call “variable” and “fixed” expenses.  We look at this a little differently than other texts that may define these categories.  First, we view “fixed” as any expense that must occur, whether or not it is the same price per month.  For example, we view groceries as a fixed expense.  We must eat; therefore, this is an expense that is going to occur every month no matter the scenario.  However, it may change by 10-20%.  Even though it can change, we still consider this a fixed expense.  Variable expenses, in our minds, are areas that may or may not occur.  Variable expenses are also purchases that could be eliminated if a cash flow pinch occurred, such as entertainment.

Once we have created monthly variable and fixed expenses, it is important to consider items that may not show up routinely.  This could be quarterly, biannually, annually, or on-demand.  Many people forget to budget for these items and these expenses create problems with the budget over time.  These expenses may include gifts, auto repair/tires, oil changes, vehicle registration, home repairs, taxes, pet care, medical expenses above premiums, clothing, annual memberships, etc.  All these items need to be reflected in a budget.

Now that the expenses are identified, it is important to review the two different expense categories.  Fixed expenses are what they are; you must pay these expenses.  However, the variable expenses may and will change from month to month.  Dealing with these is key to a successful budget.  Here are some ideas of how we believe you should view the variable expenses to be most successful:

1. The variable expenses need to be somewhat generous and forgiving for unexpected items.  This may include a miscellaneous category with enough wiggle room to successfully maneuver most routine but not monthly expenses.
2. To successfully stay on budget, allow for any unused variable expenses to “rollover” into the following month.  In other words, if one month you do not spend all of your variable expense budget, maintain the savings as you will likely overspend in the following months.
3. It is important that unplanned monthly expenses do not exceed the aggregate variable expense category.  The goal is that in any given month, a larger than normal expense is offset by lower than normal expenses elsewhere in the budget.
4. Generally, the variable expenses cannot be tight and dependent on everything going perfect for the budget to work.  If it is, more likely than not the budget will fail over the long-term.

After a budget is created, it is important to monitor the budget and make changes as needed.  It is also important to share the budget with spouses and business partners for accountability.  We are also great accountability partners!  I believe it goes without saying, however, the expenses can never be higher than the amount of income that one is generating each month.  Ideally there is enough extra income to add to savings.

REWARDS!  It is also important to reward yourself for staying on budget.  This can be done through multiple different functions.  First, if you are staying on budget and meeting all other financial goals and a bonus or unexpected windfall occurs we absolutely encourage you to take a part of it and reward yourself.  Secondly, if you are successfully staying on budget and a significant period of time goes by (you can define this) then reward yourself (you can define this also).  Just make sure that your reward does not cause a future financial obligation (debt) or cause stress to your long-term financial scenario.

In conclusion, a budget is a very personal and continually evolving plan.  One size does not fit all and we support whatever works for you and your family.  We are always happy to review budgets and help find areas where savings may be made.  This is the cornerstone to a financial plan – please engage us as much as desired during these discussions.  We always come to the table in a non-judgmental, objective way.  This is true whether you are new to the workforce, in your peak working years, or retired.