Budgeting Rules

Note:

Before we start getting the budget into surplus, there are some important rules we should follow:

  1. always validate or review the numbers
  2. ensure that the client understands what a budget is, what you are trying to achieve, the concept of surplus and deficits, and the differences between weekly, monthly, and annual income
  3. ask the client for their ideas on changes to make. Remember we are using a strength-based approach
  4. do not be judgemental.

It can be difficult for us to discuss expenses with our clients, as many options basically come down to lifestyle choices.  Often when we investigate a clients’ budget the answer is obvious, at least to us.

As financial mentors, we must not be judgemental of the choices our clients make or have made, that may have contributed to the situation they now find themselves.  However, we should make our clients aware of the financial impact of their choices.

A good example of this is the cost of a cup of coffee. The following table shows the cost of purchasing one coffee per day, per week and per month.

This same approach could be used for other lifestyles choices such as smoking, drinking, and going out for dinner.

Remember when we discuss ways to balance a budget with our client, we should use strength-based questions. For example, we could say:

“if you just gave up smoking and drinking your budget would become balanced”

A better more strength-based approach could be:

“are there any discretional items you could consider reducing to help balance the budget?”  or “what changes would you like to make that could make a significant impact to your budget?”

It is up to the client to determine their lifestyle choices.  It is not up to us to tell them how to spend their money.

This discussion can be helped by working with a client to classify expenses as needs or wants:

  • a need is an essential expense, these are described in Maslow’s Hierarchy of Needs as level 1 or level 2 needs
  • a want is a non-essential expense
  • many expense items e.g., food, can be divided into needs and wants.

Many clients will want an immediate solution to the problem or to whatever crisis they face.    This makes applying a strength-based approach to the problem more difficult.  The client may feel they are facing a crisis and want an answer – and you are trying to get them to come up with the answer by themselves.

Sometimes this can be achieved, but frequently not.    Sometimes after you have exhausted all attempts to help a client reach the answer you may need to provide more direct guidance to resolving the deficit.

Addictions

Often reducing spending on addictions like gambling, tobacco and alcohol may balance the budget but may not be realistic for the client.

You may have thought about:

  • clients may not be able to give up their addiction
  • it may be more realistic to work on reduction rather than elimination
  • addictions are just that, addictions, and clients may need professional support addressing them
  • clients may be willing in the moment but unable to change on their own.

As we are working through the development of a budget for our client, there are three likely outcomes for our first attempt to ‘balance a budget’:

  1. get a surplus balance, this is unusual, and you may find you are missing some expenses
  2. obtain a surplus after some serious work, this will take time and commitment by the client to make changes
  3. never get a surplus (without drastic action and lifestyle changes).

 

Let’s review those budgeting rules.