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. We often feel anxious because we think of fixed expenses and discretionary expenses in terms of static “wants” vs “needs” within our cash flow statements, instead of a dynamic process of prioritization. This dynamic outlook offers a different context for proven financial philosophy to empower individuals to make educated life decisions with respect to how it impacts progress toward their goals.
Imagine you have been incredibly inspired to follow your passion to establish an entity/organization. Years were spent refining the 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 but also with respect to your ability to stay true to your vision. While 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 select which initiatives will have their funding reduced or completely eliminated 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.
Much like an organization that has fixed overhead costs, you may have a list of items 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, may increase or change completely as new opportunities become available with an increase in free cash flows. But in unfavorable times, how can we be confident in prioritizing these scarce resources? Yeske Buie believes this discretion comes from monitoring your financial plan and continually returning to the Live Big® Map to help bring the bigger picture into focus.
We like to “walk ideas around the block” with you because Live Big® is manifested in unique ways for each individual, and even between life partners. Although John and Mary may have different solutions for responding to a 20% reduction in income, the process behind the decision making should not significantly change. After fixed expenses are established and a savings strategy is in place, it’s important to evaluate the allocation of the remaining funds towards discretionary expenses that further your mission. While some items may be eliminated completely (i.e. opting to iron your clothes instead of paying for the drycleaner), it is helpful to view each expense as a dial to prevent anxiety from thinking in terms of absolutes. For example, eating is necessary but it shares fixed and discretionary qualities. There is a base amount that must be spent for a healthy life, then there are layers of “wants” – dining out, ordering delivery, cooking at home – that impact the total costs. Even if experiencing various local restaurants is one of your Live Big® goals, the monthly expense can be dialed back by reducing frequency or being conscious of the cost per plate of each visit. Maybe you decide to iron your clothes, plus reduce the frequency of and cost per dining experience because that provides enough cash flow to accomplish your travel goals as well. Or is the convenience of the drycleaners and the value of your dining experiences worth more than tentative travel plans? No matter the circumstances, reverting back to this deeper sense of “why” will shape the prioritization of scarce resources.
The art of blending the practical identification of expenses and the emotional/intangible value derived from it with grounded policies serves as a foundation for and the embodiment of “It’s about the size of your life, not the size of your wallet®”.
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, as it relates to the total budget, 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!