Helping Your Clients Save: A Guide for Financial Advisors
As a financial advisor, you understand the importance of saving to meet your financial goals. However, traditional budgeting strategies often fall short for many clients—much like a fad diet that promises miracles but leaves them hungry for real results.
Budgeting Rarely Works, Here’s Why:
Difficult to Stick to the Budget
Sticking to a rigid budget can be challenging because expenses fluctuate, and life doesn’t always go as planned. One-off spending on social events, travel, and hobbies can easily derail a budget. The simple act of tracking monthly expenses can be tiresome for those not born to be accountants.
Unexpected Expenses
Life is unpredictable. Unplanned medical expenses, home repairs, or even spontaneous family obligations can throw a wrench in even the most well-crafted budget. Financial consultants often suggest adding a 10-20% cushion to monthly budgets, akin to the extra costs when building a house.
Complex Financial Situations
Affluent households often have more complex financial situations, including multiple income streams, investments, and business interests, making a simple budget difficult to maintain. Additionally, these households tend to have a high number of transactions each month, making tracking them a chore. If a day full of spreadsheets doesn’t excite your clients, then budgeting can take a back seat to more interesting uses of time, such as enjoying the afternoon with family or friends.
Budgets Are Out, Let’s Talk About Spending Plans
Now that we’ve described the pitfalls of a traditional budget, let’s consider how crafting a spending plan that aligns with your client’s financial values and priorities could help them move the needle toward realizing their financial goals.
But First, Protect Their Income Source
While we are calling it a spending plan, not an income plan, your first priority should be to ensure your clients maintain their primary source of income. It is their financial lifeline. Ensure they have measures in place to safeguard it.
Insurance: Advise them to maintain an adequate amount of insurance coverage for health, life, disability, and liability. This is particularly important if they own a business or are early in their career with a family.
Emergency Fund: Recommend maintaining an emergency fund to cover at least six months of living expenses, more if their family relies on a single income. Unplanned expenses pop up at the worst times. Be prepared.
Establish a Spending Plan and Stop the Money From Going Out the Door
While making money is their primary objective, it’s the money they keep that helps them accomplish their goals. Let’s jump into how to effectively manage their expenses with a step-by-step guide:
Step 1: Identify Their Top Priorities
“Too many people spend money they earned to buy things they don’t want to impress people that they don’t like.” – Will Rogers
We’re all guilty of it. I once had a bright red BMW that had nothing but problems. I put up with the insane mechanic bills so I could impress people. Who were these people? I can’t remember.
It’s time to determine what your clients value and align it with their spending. This could include education, retirement savings, charitable giving, travel, luxury items, etc. This critical step defines the “why” behind their spending plan.
Step 2: Differentiate Between Necessary and Discretionary Spending
Not all spending is equal. Suggest categorizing spending into two buckets: necessary and discretionary.
Necessary Spending: These are essential expenses needed to maintain their lifestyle. Identify the expenses they must pay if they make no large life decisions (moving to another home, changing their child’s school, etc.). These expenses include their mortgage, utilities, groceries, tuition, insurance, and taxes. Typically, these expenses do not need to be monitored as closely since they must occur.
Discretionary Spending: These include non-essential expenses like dining out, entertainment, shopping, country club charges, and other luxury purchases. These expenses are typically the first place to look to save extra money.
Step 3: Review Discretionary Spending
Subscribe to an app (such as Quicken Simplfi, Monarch Money, or YNAB) or use bank and credit card statements to track where your clients’ money is going. Look for patterns and areas where spending may be excessive or unnecessary. For each line item, ask if this expense reflects their values. By meticulously scrutinizing these expenditures, they can make informed decisions about where to cut back.
Note that this is where most subscription services live. Some subscriptions charge yearly, so be on the lookout—they can be easy to miss. Consider canceling underutilized subscriptions or opting for more cost-effective alternatives for entertainment.
Step 4: Pick a Few Discretionary Spending Categories to Monitor
Choose one to three discretionary spending categories to monitor closely each month. Limiting the number ensures they can manage them effectively without feeling overwhelmed. Examples include dining out, country club spending, and shopping for new clothing.
Step 5: Schedule Monthly Review Meetings
Set a specific date each month for clients to review their spending in the selected categories. If they have a spouse, make it a joint meeting. Avoid discussing spending outside these meetings to prevent constant financial stress.
Consider joining the meeting as an unbiased third party to focus the conversation and decrease the tension in the room. Clients may not think this is stressful if they are the primary earner, but imagine being the spouse who makes less or no income. Each spending discussion could feel like a performance review. How would you like to have random performance reviews at work? These discussions should be planned in advance.
Step 6: Automate Their Savings
“The secret to creating lasting financial change is to decide to pay yourself first and then to make it automatic.” - David Bach
This is the most effective step to helping your clients save more. We’ve talked about how difficult it can be to stick to a plan for the long term. One way to bypass our natural tendencies is to automate our savings. Automation can simplify saving and ensure follow-through:
Direct Deposit to Savings: Help your client set up automatic transfers to savings or investment accounts from their paycheck. The trick is to schedule the transfer on the same day they get paid. That way, they never see the money in their primary bank account.
Automatic Bill Pay: Help use automatic bill payments to avoid late fees and ensure timely payments. Similar to saving automatically, help them set up bill payment dates to align with their paycheck. This ensures their bank account doesn’t look artificially large before the mortgage or other large bills are due.
What about Savings Apps?
Utilizing savings apps to help set savings goals or to round up purchases and save the difference can be useful but your clients will be subjected to the same forces that make budgeting difficult, namely keeping up with tracking expenses month-to-month. Unless they are diligent, garbage in equals garbage out, as they say.
Additional Tips for Making a Spending Plan Work
Set Clear Goals
Define short-term and long-term financial goals to give direction and purpose to the spending plan. Many clients focus on the long-term, which is important, but having short-term goals can be a powerful motivator to save. “Retirement” may seem too far away to change behavior.
Regularly Reassess
Life circumstances change, so clients should periodically reassess their spending plan to ensure it still aligns with their values and goals. Update the plan to reflect large life decisions, such as moving, getting married, etc.
Stay Flexible
Allow some flexibility in the plan to accommodate unexpected expenses or opportunities. Remember to add a 10-20% cushion to stay on track.
Seek Professional Guidance
If this all sounds too daunting or isn’t a service you typically offer, consider hiring a daily money manager to manage the process from start to finish and help your client build and adhere to a personalized spending plan.
By transitioning from a traditional budget to a focused and automatic spending plan, clients can manage their finances more effectively and align their spending with their personal values and goals. Suggesting the expertise of a daily money manager can further help clients streamline the process and reduce stress. Reach out for a complimentary conversation to explore how this collaboration can benefit your clients.
Further Reading
How to Budget Money in 5 Steps (Nerd Wallet)
