As a long-time proponent of knowing one’s own finances to be able to live a financially secure and purposeful life, I was recently reminded of some of the challenges that arise when one attempts to actually keep track of income and expenses.  The goal is an important one; but achieving it can be thwarted in any number of ways, both human and technological.  While we now have access to systems that appear to solve all our data keeping challenges, we can sometimes overlook two fundamental issues:  (1) the importance of the set-up stage, and (2) the reality that we still need to devote time and oversight to the process along the way.  When I had to grapple with both of these issues recently, I thought of how often my clients have been faced with similar challenges.    

 

Spa Services on the Northeast Corridor?

 As one of many professionals who travel for much of my working life, I have both personal and professional expenses from the hours I spend traveling up and down the Northeast Corridor.  I can’t say that I especially enjoy the time spent on trains and planes and in taxis, but it does serve my purposes.  I’m as diligent as I can be in keeping my personal and professional expenses separate, so, naturally, I was surprised to find an item for “spa treatments” under my business expenses, especially because I didn’t remember having had a luxurious time on that particular day of travel.   On further inquiry, I discovered that the “system” had categorized a meal that I had in the Acela “Cafe” as “spa expenses.”  Rarely, actually never, have I had a spa treatment on the Acela (though I’m now thinking that this would be a good business idea).  The time spent to undo the error was tedious, and I would have hoped, unnecessary.  In this case, the automatic system failed both my bookkeeper and myself.  But I fear that I’m not alone in this case.  For the many individuals who rely on their credit card companies, or I daresay, family office or private bank to categorize their spending, the risk of misallocation is a real one.  Proper categorization is essential to create an accurate picture of the past.

 

Setting Up the Right Categories

Going back a step, it turns out that the most important part of personal finance and budgeting happens even before the fun of spending and saving begins.  That is, tailoring the system to the individual so that the categories are appropriate and useful.  Relying on a system such as Quicken,  e-money or others like them can be extremely helpful, so long as you spend enough time in the beginning to make sure that the big picture is right.  I’ve witnessed disconnects, both as a client and as an advisor.  The struggles of trying to work around a system that can’t handle complex trusts or keep records at each level—from investment vehicle, to trust ownership, to beneficiary attribution of income—can be downright frustrating.  Upfront time between client and advisor to make sure that the categories are appropriate is essential, but often overlooked.    

 

First Things First

As the number of family offices grows, and the private wealth industry continues to emphasize the notion that individuals and families should run their affairs like businesses (more on that in another column), there’s increasing emphasis on the need for clients to have their own budgets and financial projections.  In the quest to preserve wealth, the idea seems to be that quantifying one’s ins and outs will create more financial security.  There’s some truth to this, but we must remember that projecting forward works much better when we have a good sense of what we’ve done in the past.  And that requires knowing exactly in which category our spending belongs.  Until a client has a good handle on current reality, no amount of forward budgeting will make a difference in their lives. 

In the party game “Scattergories,” competing teams are given a category and must name objects in it as quickly as possible.  A fun way to test one’s ability to create groups of related objects, it highlights how difficult that process can be.  I wonder how many people playing the game would have categorized a meal on the train as a “spa treatment.”  In this case, the humans likely would have beaten the machine.