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ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | A difficult time for personal budgets

Published:Sunday | April 24, 2022 | 12:07 AM

Now is a challenging time to manage a budget due to increasing prices and income that is not increasing or is doing so at a slower pace than prices. From the look of things, there are more challenging times ahead.

The fact that it may be challenging to balance a budget now does not necessarily mean that it is a bad budget. If it is a good budget, it is easier to make adjustments.

Here are some features of a good budget.

A good budget is written and is structured to fit your personal situation and spending habits, is based on accurate income projections, and includes income from all sources. It takes full account of all expenditures, makes accurate projections and includes savings as a primary expense.

A good budget is so structured that it is easy to identify spending patterns, including cash expenditure, and allows for easy identification and analysis of variances. It also has enough categories to allow you to see where your money goes and is structured to show the natural inflow and outflow of cash but covers a long enough period to facilitate systematic planning.

It is natural to expect prices to increase, so room should be left in the budget to accommodate such increases, but it can be very difficult to anticipate the scale of price increases. This is why it is important to have a line for contingencies and to review and update the budget periodically to reflect the current situation.

Do you notice that even governments do a review of their budget and thus present supplementary estimates as and when necessary?

Budgets do not balance because cash outflows are more than cash inflows. Here are some possible reasons. Money is spent on items not included in the budget, more is spent on some items than is budgeted, some expenses are understated, the budget is not adjusted to take account of prices increases, and inadequate provision is made for emergencies. On the other side, income is overstated.

In times like these, it is critical to review the budget regularly due to the frequency and level of price increases and to make the required adjustments. With so many people, for example, owning motor cars and gas prices trending north almost every day, budgets are bound to be affected negatively for owners of motor vehicles.

How can such a situation be addressed? Motor car owners may have to reduce how much they travel or resort to car-pooling, which could cause some inconvenience. If individuals are not prepared to manage how much they spend on gas, it is either they reduce spending on other items or risk reducing their ability to save or having to deal with a budget that is out of balance.

One temptation some people may face to maintain how they live is to borrow, but this fix has the potential to create serious problems in the future. For one, loans have to be repaid and at a cost – interest. This approach then, really postpones the problem, and in fact, makes it worse in the future.

Now is not the time to buy on impulse. Sticking to the budget and shopping list, avoiding the plazas and associates who could cause you to spend against your better judgement is critical. Prioritising cash spending and controlling the credit card and the cheque book are also critical.

Where possible, buying at levels that make it possible to get discounted prices, even if this requires combining your purchases with those of family or associates may be worthwhile.

Having a responsible member of the family managing the budget and getting all family members to buy in on it is also important. Removing less important items from the budget could be considered to allow for the purchase of more important items.

Reducing how much is spent on discretionary items like entertainment may help. This does not necessarily mean reducing the level of entertainment. Changing the form of entertainment or joining with others could reduce how much it costs.

Variable expenses allow some flexibility, but some, like the cost of water and electricity, the rates of which tend to increase, are harder to manage so the focus should be on reducing consumption as much as possible by paying close attention to the meter readings.

When prices increase, the potential to save decreases and living standards tend to fall. Some people are able to counter these by increasing their earned income. Others increase their non-cash income by doing for themselves what they would normally pay others to do.

If it is not possible to increase income, it seems that other than spending on cheaper substitutes, the inevitable and bitter course is to reduce spending to match how much is available to spend.

Some individuals have very little margin to manoeuvre. Nevertheless, every effort should be made to manage resources effectively.

n Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. finviser.jm@gmail.com