Transcript Budgeting Techniques

Personal Budgeting
Presented at
Main Line Association for
Continuing Educaation
By Joel Wagoner, CPA, MBA, CMA, CFM
Assistant Professor
DeSales University
On June 20, 2013
Personal Budgeting
• Why should we, as CPA’s, be concerned with
personal budgeting?
Personal Budgeting
• Let me tell you about my buddy.
Personal Budgeting
• My buddy has plenty of good company.
Personal Budgeting
• Suggested Reading: “Another Day Older and
Running Out of Time”, by Louis Uchitelle,
printed in New York Times on March 26, 1995.
Personal Budgeting
• The good news: There are plenty of people
who are not in the situation described by Mr.
Uchitelle.
Personal Budgeting
• When Thomas Stanley and William Danko
wrote “The Millionaire Next Door” in the mid1990’s, 3.5 percent of all American households
had a net worth of at least $1 million.
Personal Budgeting
• What accounts for the difference between
“the millionaire next door” and “another day
older and running out of time”?
Personal Budgeting
The lifetime earnings of those who have become
millionaires and those who cannot afford to
retire are not as different as one might expect.
Personal Budgeting
The control that one exercises over one’s
personal spending and wise investing are
greater determinants of one’s financial position
at “retirement age” than one’s lifetime income.
Personal Budgeting
• “Wise investing” is beyond the scope of this
particular presentation.
• As for budgeting…
Personal Budgeting
• Why should we, as CPA’s, be concerned?’
Personal Budgeting
• Although assistance with personal budgeting
is not a service most CPA’s offer, our clients
(and others) look to us for guidance in matters
related to personal finance.
Personal Budgeting
• Any guidance that we can offer clients, family
members, or friends on personal finance
based on our professional expertise could
make the difference between them becoming
a “millionaire next door” or “another day
older and running out of time.”
Personal Budgeting
• What do we mean by “budgeting”?
Personal Budgeting
• Most people would answer that “budgeting”
is planning one’s spending in advance, then
spending according to plan.
Personal Budgeting
• Only 40 percent of respondents to a Princeton
Survey Research Associates’ survey reported
doing a monthly budget. More than 20
percent of respondents did not keep track of
expenses.
Personal Budgeting
• Why do so few people budget their money?
Personal Budgeting
• Chattoe and Gilbert interviewed 26 British
households, each household including at least
one person who was retired. (The original
intention of the study was to interview 26
households in which all formerly working
members were retired, but they were unable
to find enough participants to make the study
feasible.)
Personal Budgeting
• Most of the subjects in Chattoe and Gilbert’s
study had informal methods of earmarking
money for specific purposes. Most budgeting
“strategies” involved segregating money
intended for routine expenses from money for
non-routine expenses (“rainy days” or special
purchases).
Personal Budgeting
• Only five of the 26 households in Chattoe and
Gilbert’s study made “explicit allocations for
particular uses or working out a quantitative
financial plan.”
Personal Budgeting
• 21 of the 26 households did not estimate in
advance how much money they would spend
on different categories of expenditures.
Personal Budgeting
• It would seem that the majority of Chattoe
and Gilbert’s subjects’ applied reactive
strategies to cope with bills, rather than
proactive attempts to plan and control
spending.
Personal Budgeting
• How effective were these informal budgeting
strategies?
Personal Budgeting
• Chattoe and Gilbert offer several quotes from
participants that suggest the strategies were
sadly ineffective.
Personal Budgeting
• “They (bills) used to worry me…when my
husband died, I was in a perpetual state of
panic because they always appeared out of
nowhere apparently, and there were these
vast sums and I’d never dealt with anything
higher than the housekeeping.”
Personal Budgeting
• “We usually know what’s coming up. Only
things that come out of the blue. That
nobody can budget for.”
Personal Budgeting
• “I’ve always sort of believed in planning, and
I’ve found, having planned, it still, it won’t
work somehow. If you have too tight a plan, it
never works because things are always
unexpected.”
Personal Budgeting
• And, if the findings of the Chattoe and Gilbert
study apply to people in general, in addition to
the British retirees who were its subjects, why
does budgeting not provide greater value than
the comments of the retirees would imply?
Personal Budgeting
• Most traditional approaches to personal
budgeting, however, have emphasized the
planning of spending, with little mention of
any control function - the recording and
review of actual spending.
Personal Budgeting
• If we plan how we spend our money, then
don’t record how we’ve actually spent it, have
we exercised control over our spending?
Personal Budgeting
• I will suggest that the recording of how we
spend our money, followed by the review of
how we’ve spent it, is more important to the
control of our spending than the actual
planning of our spending.
Personal Budgeting
• There are many Excel spreadsheet models
available online for personal budgeting.
Personal Budgeting
• Most are designed for recording planned
expenditures by predefined categories.
Personal Budgeting
• Many are not well suited for changing the
categories for planned spending.
Personal Budgeting
• Most are not well suited for recording and
reviewing actual expenditures.
Personal Budgeting
• Caveat: Some require the recording of
personal information online in order to use
the spreadsheets. There are obvious risks to
doing this.
Personal Budgeting
• I have made the personal budgeting
spreadsheet that I use in my Personal Finance
classes available, with instructions, at
www.joelwagoner.com. (This model is free, as
is everything that can be downloaded from my
website.)