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McGill Personal Finance Essentials

Transcript
Module 4: Strategic Budget Building, Part 1

Hi everyone! My name is Don Melville and I teach in the strategy and finance areas here at the
Desautels Faculty of Management at McGill University. Welcome to Strategic Budget Building.

As you plan for your financial future, a personal budget will help you keep track of the money
you earn and spend so you can focus on your financial goals. Almost half of Canadians don’t
have budgets. So, if you fall into this category, you’re not the only one and that’s why we’re
here. 

The most successful organizations in the world like Apple, Amazon or Disney and so many
others, track their financial position to help achieve their objectives. This module will look at
budgeting. Tools and tips that we can learn from leading organizations to help you build a budget
that works for you in order to help achieve your goals.

You probably already heard my colleague Professor Madan talk about the time value of money.
In a way budgets also deal with time. You are aiming to think about today you and future you,
and looking to set up steps today to also help plan for tomorrow’s financial success. This module
will have three main takeaways. Number one: why a budget is important for your financial goals.
Second: some tips and techniques to make budgeting as painless as possible. And third: some
key steps to start putting the budget into action. 

Chapter 1: Why Budget?

All right let’s start with some definitions. What is a budget? A budget is an estimate of income
and expenditures over a set period of time. You can look at income as revenue or cash in, and
you can look at expenditures as costs or cash out. So, cash in can include salaries, and gifts you
get, scholarships. Cash out can include things like your rent or your mortgage, food and
entertainment.

A surplus is when income is higher than expenditures and a deficit is when income is less than
expenditures. And you are aiming for a surplus to give you some breathing room in the short-
term and also getting you on the path to save for future you.

So, while a final budget document is important, the actual process of budgeting adds a lot of
value and helps achieve your goals.

Chapter 2: Budgeting Tips and Techniques

Preparing Phase
When creating budgets, there are many tools and techniques we can share from leading
companies. Here, we are going to be working through a structured planning approach. And this is
a process used when you’re building up strategic plans or aiming to achieve objectives.

So, we’re going to divide the process into three main phases: preparing, analyzing and deciding.

So, let’s start with the first one: preparing. Now in large organizations, this phase often includes
what we call a kick-off meeting to get the ball rolling, so, let’s start there.

On one page, write one to three words to describe where you stand today financially.  So, the
words could be confident, or positive, or excited, or nervous, or behind, or ahead. On another
page, write one to three words to describe where you would like to be three years from now,
balancing ambition and realism. So, some examples could be financially stable, on track, feeling
good, started saving. So, this is your starting point, it gives a sense of where you are and where
you would like to be. 

It’s key to have a vision statement. It should be motivating and provide a goal to reach but with
flexibility on how to get there. So, now you have got an idea of where you’d potentially like to
be in three years. Take some time and write down what you think the five biggest challenges will
be to achieve your goals. So, they could be things like: “I hate budgets”, “I’m really in debt”, ‘I
don’t know where to start”.

Now ask yourself, you’ve got these challenges, you’ve got a vision of where you want to go.
Now the question is: how will you potentially overcome these challenges? And you don’t have to
have all the answers right now, and we’ll work to come up with ones later in the decision-making
phase. But try and think through some preliminary solutions. 

When planning your budget, you will also want to think about the information you might need to
help figure out where you stand and where you’d like to be. They can include things like your
job situation and prospects, how much cash comes in each month, how much goes out, how
much do you invest each month or each year, how automatic everything is, your bills, your
savings, how many assets you have, what you own, your debts, what you owe, information about
your insurance. So, all these things that tie into a budget.

And at this point, you don’t need to have all the information at hand, the goal is to list out the
information you’ll need to pull together and where you might be able to get it from. You’ll find a
budgeting planning tool in this module’s supplementary material that will help pull this all
together and we’ll talk more about that later.

Another thing to keep in mind as you go though this is that you’re not alone in your budget
planning. The best companies in the world work with multiple stakeholders. Your stakeholders
could be your family, your friends, your financial advisers, lawyers, accountants. Try to list out
anyone who can potentially help you achieve your financial goals today and in the future. 
And even if you don’t have a relationship with them, like you might not have an accountant or a
financial advisor, still list them out because it’s important to build those relationships when it’s
time. 

So, by the end of this phase, you should have: 

Number one: a draft vision of where you want to be in three years with some potential challenges
and some potential solutions;
Number two: a list of information you’ll need to pull together;
And number three: a list of potential stakeholders. 

Analyzing Phase
The next phase is about analyzing. So, this means trying to get as much key information together
as possible so you can make clear and what we call “fact-based” decisions. The big plan now is
to start calculating your revenue and expenditures and you can use that budgeting tool we were
taking about earlier. 

Information to look at could be how much cash comes in every month? How much do you spend
every month? How much do you save every month? Now you have some facts to work from, and
we’re going to build on that as we move forward and go to the deciding phase. And during this
phase, it’s a good time to reach out to those key stakeholders you have listed before. You want to
explain what you’re trying to achieve and potentially how they can help you.

Now that we’ve outlined our goals and looked at our cash in and cash out, we’re ready for the
third phase of this structured approach and that’s around deciding.

Deciding Phase
As you prepare to make decisions about your financial future, you’ll want to decide a few things.
You’ve finalized that three-year vision that we outlined earlier. You’ll finalize the key challenges
you’re currently facing, and you’ll develop strategies to overcome those challenges and achieve
the vision.

Look back at the vision statement you made back in the kick-off. Does it still resonate? If not,
adjust it as you need it and try to turn it into a sentence or two. It could be something like: in
three years, I’ll be in a stronger financial position with a solid foundation that I can build from
for my future. I’ll be living within my means and have saved $2,000.

Now, try and think through the five to seven biggest challenges you’ll face to achieve your three-
year vision basing it on the work that you did during the kick-off and refining it following all that
research that you did in that last phase.

So, it could include things like: How can I ensure I save enough each month? Do I have the right
people around? How can I increase my income? How can I reduce my costs? How should I
invest my savings? Following that, look for five to seven ways or strategies to overcome these
challenges in order to achieve your vision during the next three years. 
So, these could include: I will use technology to make my payments, so I don’t have to worry
about the timing and not miss any deadlines. I will invest in future me, paying myself first to
make sure I’m saving. I’ll have new relationships with key stakeholders to help with my
decision-making process. Another one could be: I’m going to look for new income generating
opportunities like a part-time job. Or another one could be: I’m going to be looking for new ways
to reduce costs even if it’s just small little things that can make a big impact later on.

So, take some time to think these through and you’ll probably refine them during the life of the
plan

Chapter 3: Key Steps to Budgeting

Now it’s challenging to get the ball rolling. One technique that leading organizations use is
called achieving “quick wins”. These are easy things to accomplish. They can be done simply.
This is a key step to success as it helps create momentum and gets thing moving.

So, list out three things that you can do in the next two to three months that will help you achieve
your goals. So, an example could be: buy one less coffee next week. Another one could be: bring
your own lunch one extra day this week. Another one could be: set up that meeting with your
bank representative to discuss your plan.

Leading companies use key performance indicators to track their progress. So, try and come up
with three to five things that are important that you’ll be checking as we go, to see progress as
you start implementing your new plan. That could be things like your bank balance, savings,
investments, cost-savings.

As you start going through this plan, try and look at these indicators at least every three months
to see how things are going. 
If at some point, you’re behind where you want to be, which can happen, just adjust and keep
going.

That’s almost all the time we have in our module on budgeting. Before we go, here are three
things to keep in mind, plus a bonus one.

So, number one: an annual budget is important because it allows you to see where you are
financially today, and it helps you set goals for the future. Number two: have a vision of where
you want to be in three years. A budget without a vision is hard to be excited about. Number
three: review your budget throughout the year to make adjustments and track your progress. And
update your plan each year if needed, based on that review.

Building off the performance of your last plan, in three years make the next one. Three years
later, make the next one and they get easier as they go. And don’t forget: celebrate your
successes.

Thanks again for joining, congratulations on the great work so far and all the best in your future
financial endeavours!