Personal, family business budgets demand straight talk, double-checking

In recessionary America, the company, personal or family budget is under constant review. More and more Americans have been forced to face spending realities, sometimes several times over. For those who have successfully scrutinized their budget, there is hopefully a great payoff of debt-free living and diminished stress down the road. Even still, maintaining a successful budget is not a light-hearted affair. It requires persistence and a commitment from all parties involved, something that can be easier said than done.

Walter Whitnum, a principal and district adviser with First Command Financial Services Inc., has been in the financial services world for more than 20 years. He started his career on the transactional side of the business, buying and selling stocks for clients. But he was looking for a more personalized experience where he could help people make a meaningful change in their financial situation instead of simply pushing the hot stock pick of the day.

“The greatest thing we can give our clients is having them know they are living within their means. It’s about coaching individuals and families,” added Whitnum. “When you see the wife smile, the burden fall off the husband’s shoulders, you see them relax, you know they’ve got it. … People move away from pain quicker than they move towards pleasure.”

With each client, Whitnum’s advisers do a complete analysis of the financial situation — the overall investment portfolio, savings, insurance, cash flow and plenty more. These evaluations often expose spending habits that can push a husband and wife’s comfort zone.

“A lot of clients live outside their means. They’re living paycheck to paycheck and it’s only because they don’t understand the importance of paying yourself first to protect against debt and unforeseen things happening to you,” he said.

Spending realities

Financial advisers agree that most families and individuals simply don’t closely monitor how much they are spending daily, weekly or monthly. Daniel Siciliano, a University of Nevada, Las Vegas accounting lecturer with more than two decades of experience in corporate accounting and finance, makes an analogy to starting a diet while scrutinizing your personal expenses.

“It’s like starting a weight loss program. They make you write down everything you eat. When you write down all of your spending, whether by credit card, cash or check, you’ll be amazed at how much it totals every week,” he said.

Mark Clayborne, author of the book “Hidden Credit Repair Secrets,” a top seller on Amazon.com, knows bad budgeting is a direct link to bad credit. On radio shows and speaking engagements, Clayborne is sometimes faced with advice-seeking listeners looking for budgeting tips. Many have a hard time separating wants and needs.

“It’s those little things that catch you,” Clayborne said. “Do you need the $25 Netflix package when a DVD sits around for two weeks and you don’t’ have time to watch it? Do you need the full entertainment TV package with 300 channels for $80 a month? Or is the $40 one fine? … Another thing I’ll even ask is ‘Do we really need the smartphone? Or are we buying into the hype?’  ”

Home phone and cable bills have been common budget cuts in recessionary years, said Bob Brown, owner of W.R. Brown E-file, a Las Vegas-based tax preparer. According to one study by Convergence Consulting Group, more than 3 million people in the U.S. have cut cable bills in favor of cheaper Internet video streaming options since 2008.

Whitnum often sees clients who were misled on home and auto payments too. Simply because a credit analyst said you can afford a large home doesn’t mean that person has looked at all of a family’s true expenses, the adviser warns.

“People ask you, ‘How much do you make? This is how much you can afford.’ Well that might mean no savings, no vacation and you stop living the life you’re accustomed to. You’re house rich but cash poor,” he added.

According to 2012 figures from the Bureau of Labor Statistics, housing makes up 34.4 percent of the average American family budget. One rule of thumb is to have your mortgage payment be no more than 25 percent of your gross income. But if there are other large expenses, like car payments that might be $500 or $600 a month plus uncontrolled discretionary spending, then a home purchase may not be the best move, Whitnum added.

What to pay first

As he said earlier, Whitnum emphasizes the importance of paying yourself first. The commonly used phrase in the investment world simply means having a certain amount set aside for savings before paying living and discretionary expenses. Often people pay bills and buy what they think are necessities then see what’s left for savings. Paying yourself reverses the formula.

Whitnum also said when paying living expenses, a certain amount should be set aside for future vacations, unexpected expenses and other commonly resurfacing expenses like car maintenance, home repairs and doctors appointments. Setting money into this type of fund, whether it’s considered an emergency fund or not, is an important way to keep from using credit cards. Whitnum sees many clients use a credit card to cover an emergency, finally pay it off, only to use it again for a new unplanned expense.

If unexpected expenses do occur, Clayborne said it’s important to analyze the situation to look for ways to avoid the problem in the future. Then, as Whitnum’s suggests, look at the budget to see about ways to set aside more money to offset unexpected expenses in the future.

Even for those who have a budget that covers these situations, Whitnum said any income increases should immediately have a certain percentage allocated for savings. Ideally, he likes to see clients setting aside 10 percent of their income for investments, 5 percent for insurance and 5 percent for reserves.

A family affair, debt

For many families, one person is often in charge of the budget, leaving him or her sometimes playing the bad-guy role when it’s time to cut an expense or hold off on purchases. Clayborne said it’s important to get the whole family involved in the budget. He said families should get into the mindset of using cash too.

If credit cards are being used, watch balances. Credit bureaus like to see balances not exceeding 30 percent of a card’s credit limit. Otherwise, a negative impact on a credit score might be seen. The ideal level is 7 percent, or less, he explained.

Clayborne also said a family budget should be set monthly and revisited every two weeks. He also encourages people to use technology that is not overly complicated. The credit pro recalls using an online system that ended up confusing him. He said most people start doing budgets with a simple Microsoft Excel spreadsheet, and many stick with it for a long time.

Whitnum also sees plenty of people who are so set on paying off their credit card debt that they’ll rob a savings account to do it. He recommends a measured approach where with a certain amount of money committed each month, a family can see the debt erased in a few years. Often setting a goal for paying off debt requires revisiting spending habits again.

“Some people come in with $500 entertainment budgets,” he said. “I have to be brutally honest with them and say, ‘Are you willing to give up the entertainment for six months to be debt free?’  ”

Buying that television, car or more modest splurge doesn’t have to be a no-go, Whitnum said. Like the overall budget, these purchases simply require planning.

“You have to ask yourself ‘How about I save and pay cash? Can I wait until it goes on sale?’  ” he said.

Clayborne also encourages people to create multiple streams of income to either add to savings or pay down debt. He said many people today find ways to make money online, or do side jobs in their field. Brown, when reviewing clients’ taxes, also sees many people doing more freelance work today. He advises clients to remember to keep track of expenses and even budget for some tax payments as well.

Business budgets

Business budgets follow the same basic principles as family budgets. But Siciliano said in the corporate world, departmental politics and personal agendas can come into play.

“The bigger the company, there are all kinds of human factors that can go on with budgeting. If an executive’s compensation is based on beating a budgeted performance level, it can create a perverse incentive to make the budget easy to beat, but believable enough for a board to approve it,” he said. “There can be a lot of gamesmanship involved.”

Many small businesses fail, he added, largely because they overlook their budgets. But often, if a small company needs financing to expand, then a bank will force a budgeting structure into place.

“Banks can make their loan based on the condition that certain financial measures in the budget are met,” Siciliano added. “At a minimum companies should have a one-year budget and at a minimum that budget should be compared to actual results every month and budgetary variances should be understood.”

But even one-year budgets can be an overly simplistic barometer of income and expenses.

Siciliano likes to see a five-year strategic company plan to augment the one-year budget.

If a business is brand new, the first year’s budget is extremely difficult to plan for, he added. Siciliano recommends trying to mirror one’s expense structure and financial ratios with another company in the same industry.

“After the first year, you lean pretty heavily on your initial operating results and the knowledge acquired in the first year to form a baseline for subsequent budgets,” he said.

But sometimes a new CEO at an established company may request a “zero-based budget,” where department leaders must create a budget from scratch.

This was a practice seen during the downturn, Siciliano said, as company leaders shook up overspending departments. 

“What happens in a lot of companies is the fat can build up. Sometimes company budgets will expand over time as small increases every year can result in bloated spending. A zero-based budget will require that departments justify every dollar in their budget whether the expenditure is 20 years old or brand new,” he added.