Business rides on a sea of paper: budgets and balance sheets, cash flow statements, and long-range plans. No well-managed corporation would start the year without a firm fix on how much it expects to earn and spend in the next 12 months. Every successful businessman has at least a fair idea of the major expenses he will be facing four and five years out. And what works at the office can work at home, say the men who make their money by counselling executives on how to manage theirs. "Use the corporate technique," urges Robert P. Fairman, a Reading partner in the Big Eight accounting firm of Touche Ross & Co.
The best technique is the personal audit - done early in the year, on your own or with hired help. It amounts to a thorough housecleaning of your personal financial affairs, and it breaks down into four parts:
The personal cash flow statement, which forecasts income and expenses for the coming year. It matches income against fixed expense and shows how much discretionary, or spendable, income is likely to be left over.
The personal balance sheet, which measures personal assets against personal liabilities and comes up with current net worth. Using the numbers from the cash-flow statement, the balance sheet is then cast ahead a year to estimate what your net worth will be then. Measure one year against the next, and you can see whether your net worth is growing as it should.
The family budget, which breaks down spending by categories - so much for fixed expenses such as mortgage payments, so much for savings, clothing, travel, and entertainment.
The long-range plan, which picks out the major spending obstacles that loom ahead: the roof that should be replaced in two years, the boat you want to buy, the heavy school bills that will start coming up in 2009, even the plans for your estate. Most corporations try to look at least five years ahead in planning. "Don't shirk at making a five-year plan of your own," say Fairman.
A personal audit takes time, and it requires total candour. Done right, though, it can tell you much about how to allocate your money: how much you can spend and on what, how much to save, how heavy a burden of debt you can take on. It can get you in the planning habit - budgeting for a bigger car, a summer home, school expenses. Done year after year, it becomes a chart of your personal financial progress and a running tally of your financial hits and errors.
You can do the personal audit yourself - probably over a weekend with help from one of the new small calculators (down to £70 or so at this writing and still falling). Some companies make personal financial planning available to key executives as a fringe benefit. And you can get some help for free. A bank, for instance, may help a longstanding customer with a personal audit. "It depends on how good a customer you are," says John Fuller, a Director in the personal planning section at Chase Manhattan Bank. "If you take your estate planning to the bank," he says, "you have a good chance to get auditing help."
A Englsih financial adviser notes that a competent life insurance agent will often provide an audit of sorts. "They'll do it to help sell insurance," he says. "Just make sure that you're dealing with a reputable man."
There is no clear-cut point at which a businessman should hire a professional to do his personal audit - though anyone earning more than £50,000 a year probably would benefit from help from an accountant, solicitor, or a qualified financial consultant. It really depends on life style, family responsibilities, earnings potential, and inheritance prospects. "The guy making £20,000 may have just as legitimate a need as the £100,000 man," says John Trimble Harris, a Leeds personal financial consultant.
If you do hire a professional, count on spending at least £300 for the initial audit. Professionals charge on a per-hour basis - anywhere from £30 to £100, with £50 an hour the most common figure. Unless your affairs are particularly complicated, the initial audit will run no more than 10 hours spread over two or three sessions. After that, two sessions a year should be enough - one for tax work and the other to review and update the audit. Again, the complexity of your financial affairs will determine how long these sessions run.
Arthur Brown, the London Accountant, explains what you should expect to get from a professional. "He'll first review in detail just where you stand," Brown says, "so that you come up with a personal balance sheet giving a picture of all your assets and liabilities. It has to dig into your affairs. The cash flow coming into the picture is then related to the balance sheet."
A professional will want to know about your objectives: planned career changes, whether you plan to upgrade your house, whether you want a second home, where you plan to educate your children. He will want to talk about your retirement plans, especially if you are over 50. And, of course, he will help with your long-range tax strategy, as well as year-to-year tax filing.
Peter Mazonas, who heads the new personal financial planning unit at Bank of America observes: "Usually this adviser is the first one to gather all the executive's affairs and put them in one basket." Mazonas thinks that the executive, especially one whose affairs are complex, should have one or more specialists sitting in on the audit consultations - an insurance man, the family solicitor, maybe your stockbroker, or possibly an accountant. The B of A service, modelled after a similar department at UK. Trust Co. of London, is so far being sold only to major corporations for their senior executives.
Most advisers are prepared to be flexible, tailoring your budget and long-range plans to your particular style of life. "A family isn't a slide rule operation," says a Essex Accountant. Jim N. Reed, a Manchester Accountant who counsels executives, adds: "I think of each person individually. One may want to spend more on travel, another on his country club or home. You can't force these things on an executive."
But an adviser will talk in terms of "reasonable" spending ranges for different items. Many, for instance, suggest that take-home pay be broken up roughly this way:
Savings, including money in the bank and investments, anywhere from 5% to 25%, depending on income level.
Other items cannot be set down that neatly, of course: medical bills, for one, and home repairs. And even the neat rules are flexible, shifting as the economy shifts.
It used to be almost axiomatic, for instance, that a homebuyer could afford a house that cost double his gross annual salary - a £100,000 home for the £50,000 man. But near-record home mortgage rates and soaring property taxes and fuel costs have all but knocked that rule out. Many advisers today regard 1/2 times salary as a more sensible limit. "The cost of living kills anything more ambitious for most people," warns a Yorkshire financial adviser. William K. Avery of the personal financial planning department of the United Bank of Denver agrees. "A lot of people are in the bigger house before they find they can't afford it."
When it comes to keeping the house going, financial advisers suggest allowing for 10% of the house's initial cost per year for over-all expenses: mortgage, interest, taxes, upkeep, and improvements.
Accountant's and budget planners suggest reviewing your spending over the past two years and picking out all the "abnormal" or "unexpected" expenses - medical bills, for instance, or car and house repairs. These, they say, repeat themselves with an astounding degree of regularity. The trick is to allow for such outlays as liberally as possible. "Failing to do this," says one adviser, "is fatal. It's where many budgets fall apart."
To keep spending in check, some professionals suggest dividing the money and giving control of it to the person who does the spending. A man might turn over 40% to 50% of his net income - after taxes and savings - to his wife for running the house. Her share would cover food, her clothing and personal expenses, children's expenses, medical bills, laundry and dry cleaning, and domestic help. The husband's share would cover the mortgage, property taxes, insurance, auto expenses, household repairs, furniture and equipment for the house, entertainment away from home, vacations, his personal expenses, and a small emergency fund for special purchases.
A second budget method is suggested by Richard C. Betancourt, Director of Aims Group, Ltd, in London. He advises using two checking accounts:
A fixed expense account managed by the wife and covering the mortgage, utilities, insurance, home maintenance, basic food costs, credit instalments, and savings.
A variable or optional expense account, including personal expenses for husband and wife, entertainment, vacations, and such. This is an effective and simple method, says Betancourt. "You will know what your discretionary money is, month-to-month, including vacation funds," he explains.
Tying It Into a Package
Inflation puts the squeeze on
To hold safe and secure in the face of moderate inflation each year is duck soup. What is crippling family budgets these days is a rampant, pernicious inflation that smacks of disaster. Creating a family budget is hard, frustrating, and absolutely essential. The £20,000 junior executive suffers woefully, and even the £100,000 top manager or professional finds himself in a bind.
Soaring prices for everything from food to home repairs are shattering all the old rules on personal spending, and forcing nearly everyone to learn some new rules. For example, your thinking on how big a house you can afford and... see: Your Budget