I was listening to a financial planning podcast recently and one of the planners on the show declared “we are not a budgeting service”. While we certainly don’t offer the services of Mabs, I disagree with the idea that we are not a budgeting service. Some of my greatest successes working with clients involved working with them on budgets.
Setting budgets acts as a constraint on consumption and allows you to accumulate wealth quicker. It places guardrails on your spending, otherwise you will spend what you earn. By doing so, you are keeping the cost of your lifestyle lower and your savings higher. Otherwise, you have a more expensive lifestyle but you are saving less so your wealth isn’t accumulating. The result is when your income stops, you have a smaller pot of money to pay for a higher cost of living.
Padraig is a single and earns good money. As he is only responsible for himself, he used to live beyond his means, regularly racking up lots of credit card debt. But he had plans. He wanted to move out of his apartment and buy a house. He also wanted to change his car. His saving grace was he was always in a work pension and had accumulated a significant pension. It was the period from now to retirement that we had to solve.
The first thing we needed to do was get rid of the credit card debt. We couldn’t move forward while he was living on his credit cards. When that was done, his overdraft was cancelled. He now had to live on what he earned each month.
Then we looked at the amount he needed to save to show the bank he could afford a higher mortgage, so that went into a savings account. We also planned his holiday expenditures (Padraig loves activity holidays). As these are important to him we didn’t cut these, there was plenty of other useless expenditure we could cut before the holidays which brought him so much fun and enjoyment. When the structures were in place, Padraig had a sense of financial freedom. He no longer has credit card debt and his financial future looks bright. It took a few months to get everything in order (we only get one pay cheque a month) but all that pressure he was feeling under is gone.
There is a difference between being a high earner and being wealthy. And a lot of high earners aren’t wealthy. If fact, a lot of them are all over the place financially. They don’t need to worry about the money, they always have money to pay for whatever they want. And because their incomes are so large, if they are ever short on money, they bank will give them a loan easily enough.
Financial chaos isn’t a nice feeling and it tends to come to a head at some stage. The constant debt repayments, the large mortgage, the constant need to work so hard to earn such a large salary to pay for everything.
Amelia is a very high earner. She also has a lot of debt. Both her and her husband are self employed and they don’t save any of their income to cover their large tax bill each year. They borrow the money and pay it off over 10 months. Their three children are in private school. Their two cars are on PCP and they roll the payments over. They enjoy the lifestyle of a family of high earners. They have pensions because their accountant told them to pay into them for tax purposes but they have little else. Given their earnings, their accumulated wealth is way behind where they should be.
They are all over the place. Amelia works very long hours and feels she is missing out on her children growing up. She would be like to take afternoons off to stand on the sidelines cheering on her children with other parents. She feels she is on a merry go round that she can’t get off.
The first thing we did was sort out their tax, switching to a pay as you go. No more massive tax bills at the end. It is taken out of their account each month like PAYE. We set about their mortgage to start making a dent in it, especially as there will be outstanding debt past their desired retirement age. We also set aside money for their children’s future, using bare trusts so it is done tax efficiently. Pension contributions and regular investment savings were set up on direct debits so they came out of their accounts on a monthly basis, like a bill. We also discussed the need to be continuously making car repayments. It turns out, neither of them are really into cars and they don’t drive very much, so they replaced one car with a small run around and the balloon payment was made on the other when the three years was up. Now that Amelia feels in control of her future, things are less chaotic and Amelia is standing on the touchline to cheer on her kids when they have a match.
For both clients I have listed above, they sent me a rough breakdown of what they spent and saved each month. I didn’t need to know how much they spent on coffee in any given day but an idea on how much went in debts, household, personal etc. Knowing how much they spent, helped them focus on their money and their plan. Even after we had got them in financial shape, they both preferred to send me their breakdown every month as they liked the exercise of doing it and the accountability of sending it to someone.
Planning is a key part of being financially successful and that means knowing how much you spend. While we don’t micro manage our clients expenditure, we do ensure that their spending it under control.
Steven Barrett
07 October 2024