Personal Budgeting

Presented atMain Line Association for

Continuing EducaationBy Joel Wagoner, CPA, MBA, CMA, CFM

Assistant ProfessorDeSales UniversityOn 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 mid-1990’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.)