The Budget In Your Financial Plan

When I meet with clients for their financial planning there is one item that seems to get the harshest reaction when I discuss the topic with them: their budget.

I mention the word budget and their mind goes to a situation where they are having to provide me with their expenses and I am going to sit and go over this item by item with them. They worried that I will be looking at these and telling them where they are overspending and that they need to save more. It is possible I might even go as far as setting a spending limit with them and checking to be sure they are sticking to that spending limit. They are apprehensive because they might not want someone to be judging them or their lifestyle in that manner.

Then it comes as a relief when I explain to them that this is not what I mean when I say ‘budget’ in their financial plan. I explain to them that the budget is simply an exercise to help them get their annual expenses down on paper, or in their client portal, to develop a baseline for their overall lifestyle. I am not going to look at this item by item to say where I feel they are overspending, what I feel needs to be corrected, or set a spending limit for them.

The budget in your financial plan provides the information that is needed to gain a deeper knowledge of your overall lifestyle and allow for analysis of whether that lifestyle can be maintained long term, or not.

You may be spending more currently due to a myriad of factors such as:

• • Putting a child through college
  • Transitioning to a new job
  • Or relocating to a new city where living expenses will be higher

 By getting these annual expenses accounted for in your financial plan it helps to put your spending in front of you and, if needed, helps you figure out if there are areas that need to be assessed and addressed over time.

Going through this part of the financial plan should not be feared. The goal of having this information in your financial plan is to analyze if the lifestyle you currently have, or the lifestyle you hope to have in future, is achievable. If this is not achievable, then there may be discussions about the overall expenses and how these can be addressed to help that lifestyle become an achievable goal.

I have had it happen on more than one occasion that a client and their spouse are nervous about doing the exercise of putting their expenses into their planning. They have never addressed this part of their financial picture and are comfortable with how things have gone to this point. They might even be nervous that seeing this in their plan will tell that they need to alter their lifestyle and they are just not ready to take that step.

My advice is that there are really 2 possible outcomes to looking at this information and analyzing it together in their planning.

• Your spending is in line with your overall planning and your lifestyle is achievable
• Your expenses are not in line with your planning, and you need to address this and look at areas to make changes.

In either scenario it is good to know where you stand currently. If you are on track, then you know this is something to keep looking at and be sure you don’t get out of line with your planning in the future. If you are not on track, then you know that you need to make corrections now to hopefully avoid a tough situation in the future where your goals are not achievable because the issue was never corrected.

In the end the biggest point to emphasize with this part of your financial plan is to not fear the budget and understand that this part of your financial plan is vital to seeing if you are on track for your goals, or not. This part of your financial plan, like all the other parts, is used to help educate and empower you to make informed financial decisions, and that is the ultimate goal of the process.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

The examples are hypothetical and are not representative of any specific investment. Your results may vary.