Archive

Prudent Fiscal Planning (Part 3):You can’t always get what you want

ReceiptsIn the third part of my ongoing series on Prudent Fiscal Planning, let’s discuss the often bugaboo topic of expenses. After following the suggestions from the last article in the series,  you should now have drafted at least your income scenarios for the short, immediate, and long term. Now, you are ready to look at the other side of the Profit and Loss (P and L), expenses, which always requires choosing what you can have today versus a time period into the future. Expense planning for what you can spend from the result of your labors (income) is never a easy task, but one that is essential for any initial fiscal planning, as well as for the evolution of those fiscal plans that are needed to align with our ever-changing reality. The following rule is important to keep in mind, as we embark on our discussion of fiscal planning as it relates to the notion of expense:

Expenses can be seen as either cyclic in nature or a one-off expense that is rarely, if ever, incurred again.  Cyclical, or recurring expenses–aligned with our habits, and those of other members in our family–define our collective standard of living, and make up most of our total monthly spending patterns.  Recurring expenses are therefore, the most difficult to reduce in the short term, and to do so, requires a collective effort and on-going conversation to what is important for individual members and the family unit as a whole. The first step when looking to plan our future expenses is to track our current expenses, so as to get a snapshot, if you will, of our current spending patterns. Tracking our spending is the place where many of our efforts in prudent fiscal planning have been dashed. One’s effort at tracking expenses can either be rudimentary or quite elaborate depending on your goals and needs.  In the keeping it simple department, one can just ask for receipts when expensing and keep them in a shoe box. Then, when the time to sample expenses for planning purposes comes about, we just dip into the shoe box, take a random sample of  the expenses for the period we are looking to review and presto, we have a expense report. Further along the simple line of doing things, one can also just write down in a note pad all expenses incurred during the tracking period, then sub-total when looking to develop a spending report. Finally, for those looking for a more complex, enduring, and laborious effort at tracking expenses, but also more accurate, you can look to implement and maintain a electronic accounting system, like Quicken or Peachtree, to name a few. These more complex approaches to accounting for expenses, though more time consuming, pay off when it comes time to produce both spending reports, as well as budget frameworks over the short and long term. However you approach your record keeping, without one, most attempts at fiscal planning will, even given the best intentions, fail. Once you have a grasp of your recurring expenses, it is time to draft the expense side of your budget to match up with the income portion you completed, since reading the last post in this series.

When making decisions about how much to spend, when, and on what, there will be winners and losers. Deciding who will get, and who will go without is complicated, no matter how large or small the group. Struggle can easily break out in families, as it does in nations, over who will get what share of the total income of the house for what they deem to be necessary expenses. Conversations will be numerous, recurring, and at many times, quite lively. Patience and rules for debating expenses are essential, if one is to be successful in the defining a spending plan. Onetime, or infrequent expense categories, can be of any amount. Those that are small in amount can usually be considered part of a Miscellaneous category, while those of greater amounts will need a category of their own in your budget and possibly a more in-depth conversation that is based on more rigorous research into the non-recurring expense.

Finally, remember fiscal planning, like most planning, is imperfect, and therefore requires flexibility both in defining and maintaining. Change is a constant, so spending plans require change as well, to remain effective. Though change is unavoidable, we humans tend to avoid the idea like the Plague. Understand that change takes place on the margin, and with prudent planning, can be managed; which leaves those that plan, one step ahead in the game of life.  The next submission in our on-going series on prudent fiscal planning will discuss how we mange our net income (i.e. the amount left over after subtracting our total expenses from total income) that over time defines our net worth, standard of living, and makes possible the achievement of our life’s purpose.  Stay tuned and start planning today for tomorrow’s unknowable future and sleep better in the process.

Here are other installments in the ongoing Prudent Fiscal Planning Series:
Part 1: Prudent Fiscal Planning is Essential in Todays Economical Turbulent World
Part 2: Prudent Fiscal Planning: Incomes Importance in Fiscal Planning and Its Effect on Our Standard of Living
Part 4: Prudent Fiscal Planning: To Save or Not to Save that is the Question
Part 5: Prudent Fiscal Planning: What I Am Worth
Part 6: Prudent Fiscal Planning: What I Really Own

_____________

Art Baird, a former high school teacher-whose academic work is in business and economics-continues to study economic and financial theory, as well as  micro and macro economic/finance issues of the day, when not playing his role as one founding partner in Creative Marbles Consultancy.  You can contact Art at art@creativemarbles.com or, read his short biography.

_____________

Picture Source: Unknown from the internet