This article was originally published on AccountingWeb. Jan, 2022.
You probably know a spendthrift, someone who is into instant gratification, taking expensive vacations or renovating their home by writing checks on their home equity line of credit, all while their credit card balance continues to rise. These people may be your neighbors, friends, or even your clients. If the latter, what can you do as their accountant or advisor to steer them from disaster?
Before answering that question, consider an old joke:
How many psychiatrics does it take to change a light bulb?
Only one, but the light bulb has to want to change.
Getting a free-spending client to change their ways can be an uphill battle, but one that is worth pursuing.
Why Is Your Client Spending Money Like Water?
Perhaps your parents raised you to be prudent. You know that working, saving and investing are the path to financial independence in retirement, if not earlier. However, some clients didn’t get the message. Why not? Here are several possibilities:
They think the good times will last forever.
Perhaps they are relatively young and earning a good income (maybe it’s even a dual-income household) and they have no children (yet). They might assume that their incomes will continue to rise forever, and they will always have a job.
They rely on the stock market.
Perhaps they have an investment portfolio that has been doing well for over a decade. Every month, they look at their statement and say, “Look how much we made this month!” They might assume the rising stock market will last forever.
They view available credit as money they can spend.
Years ago, I saw a T-shirt that read, “I can’t be out of money. I still have checks left!” When these clients’ checking accounts or money fund balances run low, they might dip into their home equity line to make up the shortfall. They likely make only minimum payments on their credit cards, and the credit card companies, for better or worse, keep increasing their credit lines.
They feel patriotic by spending.
This well-intentioned action can have negative consequences. These clients might rationalize spending in restaurants and renovating their homes as a way of supporting local businesses. They feel they are doing their part to aid the economic recovery.
They pretend to be rich to impress their friends.
These clients likely live in a nice area, and their friends and neighbors drive luxury cars, take expensive vacations, and renovate their homes. Therefore, these clients do the same to fit in.
They think their bonus will reset the meter to zero.
Perhaps they are paid a salary plus an annual bonus, so they run up debt during the year, then pay it off when their bonus comes through in January. It’s always worked before, so what could possibly go wrong?
How Can You Help Your Client?
You can help your client by offering financial planning. The bottom line is they need a budget. Unfortunately, budgets are like diets: everyone agrees they’re a good idea, but no one wants to actually do it. Here’s where to start:
Find out if your client knows how much they are spending.
The answer is probably not. If they use credit cards and automatic debits and buy things online, then money has become abstract.
Action step: You need their checking account statements, credit card statements, and home equity line of credit statements, as well as their brokerage account statement if they can access it via a debit card. [You likely already have these materials from preparing their tax return.]
Determine if they know where the money they spend comes from.
The next step is to match income to expenditures because there is likely a shortfall. Money isn’t being saved because money is being borrowed.
Action step: You need to make them aware of the problem. You have enough data to show the shortfall is being “covered” by going deeper into debt. Ask them if they have a plan to repay this debt.
Avoid adversarial roles.
Being responsible can be challenging, and people are great at shifting blame. Your client may feign shock or blame their spouse, partner, or children. They might want to shoot the messenger and blame you, but this doesn’t solve their problem.
Action step: When your doctor or dentist uncovers a problem, they prescribe a course of treatment. Faced with the prospect of the problem getting worse, the patient usually agrees. In the case of your client, if the problem has been caught early enough, they will buy into the goal of financial independence. Make the argument that the only thing better than keeping up with the neighbors is not having to work someday.
Help them establish a budget.
Your client has fixed expenses like their mortgage, car payments, utilities, and groceries. They also have discretionary expenses like vacations and eating out.
Action step: Help them set up a budget that isn’t so restrictive that they will give up.
Give them some good news.
The budget will require them to spend less, but they can increase their spending if they find ways to reduce their expenses. If they are paying a high interest rate on their revolving charge card balances, finding a card with an attractive introductory rate on balance transfers makes sense.
Action step: Motivate them to reduce their expenses by explaining the tangible rewards for their actions.
Reduce the number of credit cards they use.
Your client can probably survive with only two credit cards. The balance on a classic American Express card can be paid off every month, while having a Mastercard or Visa, too, is important because not every place accepts AMEX. Your client should also have a debit card.
Action step: Have your client carry only two cards. Lock away the others, paying the balances down over time.
Change how they spend money.
We forget about cash because we pay for everything with plastic. The attractive feature of cash is you must stop spending when you run out.
Action step: Encourage them to take out an agreed-upon amount of cash before each weekend, which will be their “allowance.” They can spend it on necessities and whatever else they want, but once it’s gone, it’s gone. They must stop spending.
Money problems are one of the leading causes of divorce. Try to get your married clients into the habit of writing down when they spend money and discussing it with each other every week. Here’s the rationale: When dieting, you often keep a food diary, writing down what you ate. This helps people from eating things they wouldn’t want to admit to later, and the same applies to spending.
Action step: Ask your clients to tell each other when and where they spent money, not to be judgmental, but to get it out into the open.
Have a periodic checkup.
A patient may agree with everything the doctor says during the appointment and then ignore the advice once they leave the office. However, the doctor will know when their advice is being ignored through blood tests and regular checkups.
Action step: Meet periodically and review the client’s statements with them. Accountability should keep them on track. Be encouraging.
Address their savings.
You will need to determine if building a cash reserve or reducing high interest-rate debt is the better approach. If they have access to emergency cash through borrowing via their home equity line or retirement plans, debt reduction may be the way to go.
Action step: Ask your client to commit to using their annual bonus or other windfalls to pay off credit card and other debt. The savings from making interest payments should give them more spending money or, ideally, money they can save.
When it comes to debt, clients often dig themselves into a hole. As the saying goes, “If you find yourself in a hole, the first thing you should do is stop digging.” As an accountant or financial advisor, you can help your clients come up with a plan to dig themselves out.
Source: How to Advise Your Free-Spending Clients, by Bryce Sanders, AccountingWeb, January, 2022
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC.
Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.Subscribe to the Dunham Blog