Budgeting: Consider a Less Labor Intensive Approach

For those of us in the personal finance field, the idea of budgeting, while not very exciting, is probably not considered a big or daunting task. We know what needs to be done and most of us, I suspect, use the traditional method of identifying expenses, line by line, and setting aside the appropriate amount each month to meet each of those expenses. This takes time, no doubt, but it’s not a problem for those of us who live in this world.

However, for those who have never created a budget, are afraid of detailed numbers, or fear the impact of a structured budget on their lifestyle, the idea of creating a budget can be perceived as worrisome or, at the very least, restrictive. So, rather than engaging in a practice they probably know is good for them, they avoid “facing the music,” if you will, and don’t budget at all.

In our ideal world, we financial advisors would have each of our clients work from a detailed traditional budget, showing expenses, due dates, allocated funds, accounting for fixed and variable expenses, etc., but unfortunately, this methodology doesn’t work for everyone. Some people simply can’t live with the structure of a traditional budget or don’t have the discipline (many would admit it, I’m sure) to record expenses on a regular basis and track their budget activity. So how do you sell budgeting to those who don’t want to adhere to a traditional budget?

A B-planning approach to budgeting

Before setting a budget, financial advisors typically suggest that clients set short-term, possibly medium-term, and long-term goals. In doing so, of course, we ask our clients to set aside the funds necessary to achieve these goals through their budget. In other words, there would be a line in the budget that says X number of dollars are allocated to short-term goals this month and X number of dollars are allocated to long-term goals such as retirement.

For the person or partnership who finds the structure of a formal, documented budget too cumbersome or impractical due to time constraints, or who is not interested in maintaining such a plan, or who simply does not have the discipline to manage a formal budget, Plan B is a hope.

The Plan B budget has two basic steps:

1) Goals are established, the cost to achieve them is determined, and money is set aside on a regular basis to meet those goals.

2) Expenses are determined and the appropriate amount of money is set aside regularly to ensure that expenses are paid on time, every time. Plan B budgeters are encouraged to pay their bills by the budget due date through a bank payment system.

The fundamental difference between the traditional budget and the Plan B budget I describe here is that after determining goals and expenses in Plan B, I do not keep track of expenses and payments via a formal budget plan. While as a personal finance professional, I don’t consider this method the best way to budget, I do consider it a reasonable alternative for those who don’t want to take the time to create and stick to a traditional budget or who are afraid of the structure and discipline that comes with a traditional budget.

You and I can see a budget as putting ourselves in a position to spend freely once expenses are paid and goals are funded. Often, clients view a budget as a hindrance and something to be avoided because of the perceived negative impact on their lifestyle.

A Plan B budgeter may determine that a reasonable long-term retirement goal is to have $1 million in assets by age 65. In this case, he or she will set aside the amount needed to reach this long-term goal each month. Since the budgeter may have avoided traditional budgeting due to a lack of financial knowledge and discipline, hopefully the Plan B budgeter will now put retirement savings on autopilot and have the amount needed to reach the pre-set retirement goal of $1 million taken from his or her salary each month.

Whatever is left over after the retirement contribution and other pre-determined goals are met will be allocated to predetermined fixed and variable expenses; no recording is required. Clearly, the key to success here is to ensure that the goal and expense calculations are reasonably accurate and that the income needed to meet the goals and expenses is available, much like a traditional budget – but without paperwork.

As with a traditional budget, I expect Plan B participants to review their goals at least once a year and adjust their goal contributions and expenses accordingly.

Encore une fois, le plan B n’est pas la méthode de budgétisation préférée, mais s’il permet au client d’atteindre le même objectif que le budgétiseur traditionnel, à savoir la réalisation d’objectifs et le paiement régulier des dépenses, envisagez cette alternative moins laborieuse à la budgétisation traditionnelle.