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Helping Clients Develop a Household Budget

love jerry

I am frequently asked by clients to help them develop a household budget. As most CPAs know all too well, that question can be a very difficult one because it depends on many factors and there is not a “one size fits all” budget. However, when clients are asking this question, they generally want some guidance. Therefore, this article is designed to give you some of my thoughts on how to approach this question and some resources that may help you give them some guidance.

The first thing I ask them to do is to summarize what they are currently spending.  I generally want at least three months summarized, but six to twelve months is even better. I tell them they can develop this summary in one of several ways: 1) pencil, paper and adding machine, 2) a spreadsheet such as Excel (there are some templates that might help), or 3) one of several programs like Quicken. The primary purpose of the exercise is to identify where they are currently spending their money. I find very few families have a clue where the money is going and are surprised at the results of this exercise.

Spreadsheet Style

Here are some sources for free templates for spreadsheets:

1.  www.Squawkfox.com Kerry K. Taylor is the creator and lone blogger at Squawkfox.com. She started Squawkfox in 2008 as a financially fun newsletter for friends.  She has a spreadsheet that is very easy to understand, to use and allows the person to add rows for household expenses unique to their spending.  Another thing I like about her spreadsheet is it has a column for each month.

One shortcoming to this spreadsheet is it requires the person to summarize their transactions in some manner to then enter a total in the column for the month.

2.  This spreadsheet could resolve the shortcoming of the Squawkfox template and give your client a spreadsheet that is easy to learn, modify and use.

https://docs.google.com/spreadsheet/ccc?key=0Av84vhVmyqhUdEQyV0hCQVotMEdrMFZrb0dzMTBBMUE

This template was created by Aman Siddiqi and is posted in the Google Docs Template Gallery.  With this template you can help the client determine the headings for each category and they can post an unlimited number of transactions.  Of course those of us old enough to recall the days of posting expenses on the “13 column green pads” will recognize this as that spreadsheet. I would set the template up with a separate worksheet for each month.

3.  This template was created by Bohdan Rohbock and is posted in the Google Docs Template Gallery. 

https://docs.google.com/spreadsheet/ccc?key=0Av84vhVmyqhUdGU5NGVNU0ozRnR1LVQ1ejNkb1hna2c#gid=12

With this template you can change the expense category in the column headings and they can post an unlimited number of transactions. However, it is not very easy to add more columns because the existing columns are linked. It does have the twelve months already set up for you.

It is important for the client to summarize their cash expenditures. Ideally, they will be able to put them into categories that have been identified. However, if they are going back over the prior year it is highly unlikely they can classify all their cash expenditures. In which case, I usually set up a category for “cash expenditures.” This is an area where the Generation X and Y far excel over the Baby Boomers. I find that Generation X & Y may not even carry much cash. Instead they are using their debit card, which will show up on their bank statements with the identification of what they are spending. For the Baby Boomers, I usually ask them to carry a small pad and write down all their cash expenditures for a month or two so we can get a handle on where they are spending their cash.

 

Using Personal Finance Software

Of course, it would be much easier to summarize the client’s expenditures with the use of one of the personal financial software options on the market.

1. The starter edition of Quicken normally retails for $40 and will accomplish the task with very little set-up or training time. This is the option I generally make to clients because our staff knows how to use it and they can help the clients in the set up and answer questions if they are stumped. Quicken is very easy to use and complete.

2. Microsoft Money Plus Sunset is also an option.

3. A quick search for “Personal Finance Software” brings up this site:

http://personal-finance-software-review.toptenreviews.com/

This site lists nine different software options (including Quicken) and rates their features. All of these software options are under $60.

 

Online Options for Personal Finances

What about personal financial sites? For the most part, I agree with Len Penzo who was published by MSN Money on August 17, 2012 in an article titled “A Great Way to Track Expenses.”

“As for keeping tabs on how you spend your money, a panoply of options is available. I realize that many people are initially attracted to sites like Mint.com, and MyBudget-Online because their automation features essentially make the job of tracking your money almost effortless. The trouble is, in the world of personal finance I believe too much automation can be a curse. That's because when money management tools become too user-friendly, a lot of folks have very little incentive to understand the data being made available to them.”

Overall, in the context of an engagement and my request for a simple summary of where they are spending their money, I feel the online options are overkill and for the most part will cost the client more money than the other options.

 

What to do with this Info?

Almost without exception, when I sit down with the client after the above exercise, as they hand me the summary of their expenses, they will immediately begin to tell me what they have learned about their spending habits. No question, this is an eye-opening exercise for them. But to me the real value is the importance to develop a budget with them based on their priorities and to incorporate things that are important to them.

For example, many people in this part of the country tithe to their church. Yes, I mean they carefully calculate 10% of their income and give that much or more each year. If I used a standardized budget template to build a budget for them it would not be consistent with their core values.

Other factors to consider:

1. Current housing cost. If we determine they are spending too much for their home mortgage or rent, this will take some time and planning to modify.

2. Utilities. Same as the housing costs, if we determine this expense is higher than desired, it will take some time and planning to determine how this can be modified. Some suggestions could be implementing energy efficient modifications, life-style changes or even deciding that this factor may influence item #1.

3. Debt of several sources. It is not uncommon that we conclude that the biggest issue that is disrupting their budget is debt. It may be that they have large student loan debt, large car payments and/or credit card debt. This can be problematic because they cannot just turn the thermostat down and cut their debt. Resolution to this item can take years to resolve.

4. Then we move into identifying what can be the most difficult items. It is not uncommon for one or both spouses to have a hobby that is very expensive. It may be a boat or other recreational type vehicle. It could be hunting, fishing, golfing or shopping. 

As these items are identified it is important as a financial planner that I understand it is not my job to place my judgment into their budget. If one or more of these items is very important to them, then we need to incorporate them into their budget to determine if it gives them the financial balance they desire, and perhaps equally important giving them the ability to fund their goals and dreams.

 

Designing a Budget

I believe you should first classify the items they are currently spending into three basic groupings: 1) Recurring Expenditures (such as mortgage, utilities, food and other recurring monthly expenses), 2) Financial Goals (such as funding their 401k or IRA, health insurance, college expenditures) and 3) Discretionary Spending (such as item #4 for recreational items and hobbies).

As CPAs we frequently are looking for benchmarks to use as a guideline. Here are some guidelines that I have found over time. However, I offer this warning as you read this section, “one size does not fit all.” I strongly believe you need to listen to your clients and allow them to develop a budget that fulfills their goals and expectations.

1. Housing 30%

2. Utilities 5%

3. Transportation 15%

4. Clothing 5%

5. All other debt 15%

6. Savings 15% to 20%

7. Everything else 10%

Here is another mix with small variations

1. Housing 25% to 30%

2. Utilities max of 10%

3. Personal items and Groceries 15% to 25%

4. Transportation 10% to 15%

5. Everything else 20%

Here is a mix with a bit more detail

1. Housing 25%

2. Utilities 8%

3. Food 14%

4. Clothing 4%

5. Medical/healthcare 6%

6. Charity 4%

7. Savings/Insurance 10%

8. Entertainment/Recreation 5%

9. Transportation 14%

10. Other debt or discretionary 10%

This grouping is based on Dave Ramsey’s program from The Total Money Makeover

• Charity 10% to 15%

• Savings: 5% to 10%

• Housing: 25% to 35%

• Utilities: 5% to 10%

• Food: 5% to 15%

• Transportation: 10% to 15%

• Clothing: 2% to 7%

• Medical/Health: 5% to 10%

• Personal: 5% to 10%

• Recreation: 5% to 10%

• Debts: 5% to 10%

The other factor that I think you need to take into consideration as you work with these ranges for a family budget is their age, family size and total income. Each will influence all of these items. There is no question, as the family’s total income grows many outside forces will begin to compete for an increased portion of the budget.

Taking only the mortgage/rent factor as an example. No doubt when a young couple is first married and establish their first budget as a family they opt for a small inexpensive apartment. At this stage they may be at the lower end of the range for housing. Then as they begin to establish their careers and their income increases or perhaps their family begins to grow, they purchase their first home and move up the scale for how much they are spending for housing. As the family grows and the kids reach their teen years they justify the need for a larger house. Finally the day comes when the nest becomes empty and they decide it is time to downsize their housing. 

All along the way, there are outside influences encouraging them to stretch the budget. The financial institutions may be telling them they can qualify for a larger mortgage. The real estate professionals are encouraging them to buy at the upper end of their budget range and grow into it because after all, you expect the value of the house to go up. Perhaps even family members or their peers are encouraging them to buy in a certain neighborhood. Suffice it to say when it comes to the family budget there is a large variety of factors influencing its development.

In most families, discussing a budget is a difficult matter. It is frequently said, money is one of the most common stresses to a marriage. As a financial planner, it is important we help families deal with this potentially stressful element with compassion and attempt to help them find the common ground as they set financial goals and realign their spending to move toward them.

Jerry Love, CPA is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..