"B" is for "Basic Budget."

June 12, 2019

Sesame Street, the longtime children’s educational show, turns 50 this year.  Count Von Count introduced a recent radio segment, which looked at the educational program’s strength and success factors.  One longtime employee explained that Sesame Street was able to keep up with the times, while still transmitting timeless basic education and values.  This video, in which two rapping crows teach Elmo about saving is a good example.  Not only is the rap music an update to earlier music, but the subject matter current also.  Sesame Street recently launched a campaign to teach financial literacy and budgeting to young children as one of the program creators and Cookie Monster explain in this news report.  You can also find financial education activities to do with children here:.  Although it is a children’s program, Sesame Street is a good barometer for the educational demands of our times.  Topics make it to Sesame Street because they are important, and because people (from a span of three generations now) seem to be growing up with an inadequate education in these topics.  Budgeting fit both of those criteria.  Even as adults, we aren’t always good at budgeting, and we really need to be.  As a financial planner, I know that a good budget is the foundation of a workable financial plan.

 

 There are different approaches for considering how budgeting fits into financial planning.  If a client has steady income, money in an emergency fund, decent retirement assets and college savings plans, a full complement of life, health, property-casualty and long-term-care insurance, low non-mortgage debt, and general expenses that are less than the family income, then it is probably enough to paint the picture with broad brush strokes.  “Approximately how much are your living expenses per month?”  “Do you anticipate any income changes or large purchases?”  Of course, this works best if the client has no children or pets, because those can be unexpectedly expensive.  And the client should have no health weaknesses, because a sudden diagnosis can change everything.  And he or she should work in a non-dangerous, recession- and tariff-proof job and live in an area not-prone to extreme weather or natural disasters. And the client should not have elderly parents that might need help, or a child or sibling with special needs.  But for the people, whose life is not so tidy, it can be important to take a deeper dive into where, exactly, their money is going in order to better decide where it should or could go.

 

It is an oft-stated disclaimer in financial services that: “Past performance does not guarantee future results.”  This is a way of reminding clients that while a financial professional may be held responsible for the suitability of a mix of investments, she or he cannot predict the future and so cannot be held responsible for the absolute performance.  However, for most of us, past spending patterns are actually a very good way of predicting the future.  For most of us, spending, saving and charitable giving are inertial activities, a situation reinforces by auto-pay and one-click online purchasing.  We will continue to act in the way we are acting unless some outside force causes us to change our behavior.  That means that it is very important to be clear on past and current spending patterns in order to input into the financial plan assumptions about future spending that are reflective of what is likely to happen.  Garbage in, garbage out applies just as well to financial planning as to any form of analysis.  As planners, we use calculations of today’s expenses as bases for those expenses going forward.  If a client is not tracking her or his spending on home, auto, food, entertainment and the like and you simply ask her or him to provide a good estimate of “living expenses”, the answer you get may be $5,000/month when the reality is closer to $7,000.  That $24,000/year differential is problematic enough now when your client is 40; but 30 years later, when s/he is drawing on retirement savings, your projections are going to be off by double that amount due just to inflation.

 

Most financial planning softwares will allow the planner to do a certain degree of expense analyses.  Most now have a feature that allows either the client or the planner to link bank accounts directly within the software.  This means the program can download transactions directly from the client’s financial institutions.  The program will then use algorithms to categorize the transactions.  Usually, both the planner and the client are able to access the client’s data, facilitating collaboration.  There may be a limit to how many categories the software will accept; and typically, the data only extends back to the date the clients linked the account, making it less useful for new clients, where budgeting may be one of the main, getting-to-know-you priorities for the planner. 

 

Some clients may already be using a budget creation and a tracking app such as Mint, Good Budget, You Need a Budget, Banktivity, etc., although the ones who need the most support in budgeting may not have taken that first step.  There are a lot of apps out there, so it takes a bit of time to sort through them.  The apps will have some of the same limitations as the planning software in terms of categories and it may take some work to translate the budgeting app’s categorization to the planning software’s categorization when it comes time to use the budgeting data to build a forward-looking financial forecast.  Most budgeting apps cannot retrieve data earlier than three months prior to the date the accounts are linked and may not be able to take csv or Excel uploads of prior historical data.  Some apps do allow the account holder to invite others to view their data, and those others could include their financial planner and their tax professional.

 

A third option is using a bookkeeping software like Quicken or QuickBooks.  These are endlessly customizable, because you can create an unlimited number of custom income and expense categories.  And in some you are able to combine the manual upload of historical data with linking to keep up with future transactions.  They can also accommodate multiple sets of books if, for example, the client is self-employed and wants to have a business budget that is separate from her or his household one.  In the case of parents who have an adult child with a disability, the parents can run separate budgets for the adult child and for themselves.  Or three sets of books, with a separate set for the Special Needs Trust.  Keep in mind that some bookkeeping software is set up more for small businesses than for personal/family bookkeeping.  You will want one that can handle both. Well. Most bookkeeping softwares are also designed such that data files are passed back and forth between two collaborators that each have the software, rather than by providing each collaborator with online access to the data.  In other words, both the planner and the client need to have the same software in this case.  The need to pass data files back and forth can make it tedious to work together on categorization.

 

There are some technical hurdles when it comes to collaborating with your financial planner to build a budget.  But this can be a critical step in the planning process.  If you are not able to cover your bills and your debt payment, you need a budget.  If you are able to cover your bills and debt payment but you have no free cash to save and invest for your retirement or for your children’s college or to fund a trust for your child with special needs, you need a budget.  If you are saving, but not enough to reach your goals in a reasonable time frame, you need a budget.  If you are on track with saving, you may still want a budget to make your spending and saving more efficient and controlled.  Certainly in all these cases, you need a budget and a thorough knowledge of how much you are spending in each category now, in order to make accurate forecasts of how much you will need to support yourself over your lifetime.  If you are the parent of a child or adult child with special needs, budgeting can be especially important because you are planning over two time horizons.  You, as parents, need to get yourself through retirement AND you need to provide your child with a disability supplemental funds to last throughout her/his lifetime, which may extend another 50 years after yours.  Sesame Street reminds us that it’s never too early to learn financial literacy.  It’s never too late either.

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