Budgeting
Budgeting is a word that people rarely like to hear. Many switch off the moment they hear it. Let’s step back for a moment and see if that unpopularity is justified.
In essence a budget is supposed to be a money plan. Where will your money be spent in the next year and beyond? What are your highest priorities in the short, medium, and long term that you would focus your finances on if you were to take the time to put a plan together?
Does that really sound so scary? Deciding what you are going to do with your money seems like a very logical and beneficial thing to do. With no plan in place, anything could happen, and looking back, just about everyone who failed to plan realises they could have, or should have done a lot better with their finances than they did.
So, what is it about budgeting that makes it so unpopular? You need to know this because your kids will most likely develop the same attitude as everyone else who hates the thought of doing a budget unless you can give them a positive outlook on planning their finances that will circumvent that negative attitude.
Just about every one of us has heard the money experts giving their top tips for financial success at the beginning of each year. Their number one tip without fail is to ‘Do a Budget’.
It seems like good advice, but most people ignore it and wait to hear the number two tip!
Why?
You need to look at human nature to answer this question. Rarely does anyone do anything beyond their normal habits and routine without there being an emotion involved. There are two primary reasons why ‘doing a budget’ has become so unpopular, and both have an emotion behind them.
Firstly, the word ‘Budgeting’ has come to be associated with reducing costs, cutting back on non-essential spending and cutting out luxury items.
Nobody likes the thought of cutting back and going without, so unless the pain caused by money stress has become higher than the pain of budgeting, they are not going to embrace the idea of doing a budget.
Secondly, at some time, most people have had a go at creating a personal budget for all of the positive reasons mentioned earlier. However, most of them have found that budgeting simply did not work for them, so they got annoyed and frustrated, and gave it up.
Since they believe the experts must be right, they assume THEY are the problem and develop the belief that they simply are no good at budgeting. Unfortunately, this then becomes a self-fulfilling prophecy!
However, there is a major flaw with budgeting that very few people understand, and it is the reason people find that budgeting doesn’t work for them. If they knew about this flaw they would not draw the incorrect conclusion that they are the problem.
You need to know why budgets fail so you can teach your kids how to make their money planning lead to success rather than frustration and pain.
The Spending Planners Institute provides a system that replaces budgeting, and it overcomes this problem. Because it works so well, it has changed thousands of people’s financial direction for the better, and in many cases they have been able to pass this new knowledge on to their kids.
The Institute exists to support Spending Planners who in turn help people to overcome their money challenges, most of which have been brought on by a lack of financial education when they were kids, and the false message that budgeting is the answer.
In this chapter we will look at why budgets fail and the basics of Spending Planning (that does work) and how to introduce this to your kids.
Put very simply, a Budget is a way of comparing income with expenses in an attempt to bring the two into balance.
If a budget reveals that there is more income than expenses, an average person will happily add a few more items on the expenses side of their budget, such as saving or shopping.
On the other hand, if a budget reveals the expenses are higher than the income, an average person will look at what expenses they can reduce or remove, or they will look for ways to increase their income (or a combination of the two).
Once the budget has been balanced there is the expectation that everything will be fine going forward. However, this is rarely the case!
The video above compares between two families with identical budgets. One lives happily
throughout the year ahead, and the other encounters many periods where they
cannot pay their bills on time. They are constantly under money stress.
A Budget only compares income with expenses. Once it’s balanced, a budget tells
you that your income matches your expenses, and you SHOULD BE ABLE to pay your
bills. IT DOES NOT TELL YOU HOW to pay your bills!
Family A and B had identical budgets but vastly different outcomes! Family A was
able to pay their bills on time because they had more money in the bank on day 1 than Family B had, but their budgets both balanced, indicating that they should be fine. For family B, nothing could have been further from the truth!
A Spending Plan introduces dates (timing), to a budget and reveals what will happen looking into the future. Family B would have seen the problems that buying the TV would cause them if they’d had a Spending Plan. With a Spending Plan you get to see any problems that may occur in the future before they happen. You get to see if there are bills that fall due when there are insufficient funds in your account, and if so, this allows you to find solutions to these problems, usually long before they occur.
The good news is that in the example above, both families ended up having a great year. Family B used a Spending Plan to find a solution to their problems. They made 4 changes:
1. They delayed the start of their Holiday Savings until after Christmas
2. They phoned and delayed their next Electricity payment by 10 days
3. They switched their next Car Registration payment to half yearly rather than annually
4. They sold some unwanted DVDs for $50
The graph below shows how these changes were able to resolve the problems caused by buying the TV. They actually ended the year with just over $2,800 in the bank so the following year will also be fine.
This short video will give you further insight into Spending Planning:
Teaching your kids about the limitations of budgeting, and more importantly, the
benefits of planning their spending, will be one of THE most important lessons you
will ever give them.
Kids have no financial commitments, so when they earn or receive any money at all it is surplus. There is very little planning that they can do. It’s just a question of “Will they save it or spend it”?
However, if your kids do not get to learn about and experience planning for ‘real’ expenses before they leave home, they will find it very hard to manage after they do leave.
As a parent you can help by gradually introducing your teenage kids to Spending Planning. Since you will be paying for many of their expenses anyway, you could help them by giving them the responsibility of planning for and paying those expenses themselves (under your supervision).
By the time they are in their last year of school your kids could be planning for and paying for school fees, books, uniforms, formals, deb balls, end-of-school celebrations, sporting fixtures and anything else that they are involved in that can be reasonably predicted. You can teach them how to create a Spending Plan and how to follow it, so they always have the money to pay those expenses when it’s needed.
If you let them see the expenses in your own plan and maybe even let them help with some aspects of the planning, they will have a more realistic view of life beyond Mum and Dad supporting them, and a much better idea of how expensive running a family can be.
Budgeting Benefits
Now you know about the massive benefits of Spending Planning, you can be
comforted to know that the advice the so-called money experts are giving relating to
budgeting actually does have a place. Many of these people are not yet aware of the
work the Spending Planners Institute is doing in this space, so they simply give the
best advice they know of when they say you should “do a budget”.
They are recommending that you decide before the year begins, how much you will
spend on food, clothing, accommodation, transport, entertainment, savings,
education, gifts, holidays and so on. In itself this is good advice, but it breaks down
after you have made the decisions about how much you will allocate to each area,
and you need to actually apply those decisions to your day-to-day life. They have no mechanism to make that happen so easily that it is difficult to fail, and that is where
a Spending Plan makes all the difference.
Teaching Budgeting
You begin teaching budgeting when your kids are very little. Maybe they get some
money for their birthday or for doing their weekly jobs around the family home. As a
parent you then have the opportunity to teach them about budgeting by discussing
with them how they will allocate that money. You would most likely suggest that
they spend some, save some and give some to a charity.
Your job will be to explain the reasons why they might allocate money to each of the
three areas, and then ask them to decide how they will allocate their money.
Money boxes that have the three compartments are available, but you can also be
budget conscious and use three empty vegemite jars, jam jars or similar. These will
cost you nothing, and because they are usually made of clear glass your kids will see
their savings growing. Use an ink pen to write the three purposes on the jars.
As they get older you would open bank accounts to replace the jam jars and begin to
teach them about Flow and automating the transfer of money according to their
chosen distributions across accounts (Unit 3).
Teaching Spending Planning
By the time your kids are in their teens and in high school, you would show them
how to set up their own Spending Plan. This would allow them to create a plan for
schoolbooks, uniforms, Christmas shopping, maybe purchasing their first car and
whatever else seems appropriate for your kids at that time. It should also allow them
to have some money for them to do with as they like as a result of that planning.
By the time they reach adulthood your kids should know:
- That a budget is a starting point that will help them to begin the journey towards taking control of their money.
- That a Spending Plan will empower them to look forward with their money planning to avoid embarrassing cash shortages at crucial times
- That a Spending Plan will allow them to make the most efficient use of every dollar they earn
- How to create and follow a Spending Plan
- How much family expenses such as food, fuel, electricity, phone, rates, insurance, car registration and other basic family expenses cost
- How important it is to plan ahead for major expenses. E.g. When buying a car, looking beyond the initial purchase price to the cost of ownership such as vehicle registration, tyre replacement, servicing, insurance etc.
