Why budget is not a dirty word

A fellow advice professional I met recently said he avoids the term ‘budget’ when meeting with clients as they see it as a dirty word. He went on to explain that if clients think that you are going to make them do a budget, they will think that their lifestyle will suffer … they won’t be able to buy the kids the Christmas presents they want, have their annual family holiday and baked beans will be a regular at meal time.

How can you say budget is a dirty word?  It sounds a little nerdy but I actually believe that budget is a beautiful word and often discuss the importance of budgeting and cash flow management with clients and colleagues.

Many clients believe that budgeting is all about sacrifice – in other words they will have to cut back, sacrifice the lifestyle they enjoy now so that they can have the lifestyle they want in retirement.

I would argue that effective budgeting is actually about balance and opportunity. Firstly, it’s about finding that balance between the lifestyle you want now versus the lifestyle you want in the future, which includes planning for the things that are important to you, both short term – like having the Christmas you want for your family, or the annual holiday – and long term goals like paying off your home loan, buying an investment property or enjoying a comfortable retirement.

Santa has all year to plan for one very busy night, does he look stressed to you? That’s because he has a plan and a budget.

Budgeting also gives you the opportunity to review expenses, and often save money on the ‘fixed’ unavoidable expenses (such as home loan interest, insurances, phone plans, etc) and more importantly, can also often reveal surplus money that could be used for wealth creation rather than just ‘disappearing’ through unconscious spending.

I also firmly believe that our ability to create wealth is not a factor of what we earn, or even how we invest our money (although we need to be smart about this… another topic for another day), but it is to what degree we can spend less than we earn, in other words, our ability to save, that determines our end wealth position.

When discussing financial plans with my clients I like to make sure they understand that I can’t predict the future, indeed projections in their plans are for modelling purposes and assumptions are based on past trends. I will never be able to affirm to them that ‘now’ is the right time in the share market to buy up big, or conversely the right time to sell down shares to cash in on recent gains, or even answer the question – ‘should I buy shares or property?’ … I’ll always say you should own both for different reasons!

As an adviser I believe that a big part of my role involves educating and guiding my clients to make the right financial decisions for the right reasons, and formulating a long term wealth creation plan incorporating a range of strategies depending on their goals, life stage and risk tolerance, among other things.

Increasing contributions into super, regularly investing into a professionally managed share portfolio, buying the right investment property, paying down the home loan sooner through additional repayments (and the right loan structure… but I’ll save that one for another blog) are all great strategies to create wealth depending on your situation. Some of these may also have some good tax benefits along the way too.

But if you don’t know how much you have available to create wealth, how can you commit to any of these strategies, let alone ensure that you have a range of options in your plan to offer diversification and flexibility to adapt should your circumstances change? Choosing the investment strategy is only possible if you know how much you have to work with.

So if you don’t like the word ‘budget’, call it a spending plan or what you want, whether it be cash flow management, savings plan, spending plan, or something else, we need to be more aware of where our money is going, and how it is (or is not) working for us to be able to achieve our goals. Once you have a budget and we know what we’ve got to work with, we know that our financial plan and investment strategies are manageable and sustainable, and should enable us to have the lifestyle we want, both now and in the future.

Special thanks and acknowledgement to Melody Edwards from Team Evalesco for the fabulous Santa Claus photo, all the way from Austria!

I have an amazing opportunity in my financial advisery role to make a difference to people’s lives by helping them to achieve what’s important to them.