How Clients Behave When Money Gets Tight

Ronald Reagan was known for many things including the question: “Are you better off than you were four years ago?” (1) The question was asked in the televised debate between Carter and Reagan in 1980. It’s been said the question helped Reagan win the election. With inflation making it’s impact felt, clients are not feeling better off. From a financial planning point of view, what are clients doing differently and how can advisors help them weather the storm?

1. Giving less to charity. Charitable giving is the ultimate discretionary expense. It is very easy to cut. Who will notice if you don’t put money into the collection basket or do not contribute to the volunteer fire company’s annual appeal?

Advice: The charities still need the money. They might need more because their costs are rising too. One solution is to keep giving, but give less. Your continuity will be appreciated. There are other ways you can give including donating appreciated stock or listing your favorite charity as an IRA beneficiary.

2. They are delaying paying bills. A standard business practice when the economy slows down is to press for immediate payment while stretching out disbursements as long as possible. People do this too.

Advice: This is a bad idea for people, because late payments to credit cards can bring you into the world of penalty interest rates. This also damages your credit rating. If there is a serious problem, call the lender and talk about a payment plan or some other form of relief. As a financial planner, you may have some knowledge in this area.

3. They are making minimum payments on charge cards. This is preferable to skipping payments or making late payments. The rates have risen on revolving charge card balances. According to Lending Tree, as of June 2023, if you have good credit, the average rate is 20.51% and bad credit might mean you are paying 27.61%. (2)

Advice: Has your client looked at balance transfer offers? They might get a holiday from interest on the amount they move over. The losing lending institution might charge their version of a surrender fee.

4. They are reducing retirement plan contributions. They want to see more money in their paycheck, so this seems like a good strategy. You know why it’s not.

Advice: Start by doing the math. How much do they see when a before tax dollar is diverted to after tax dollar status? Probably not that much. Their retirement plan at work might have an emergency loan feature if that is part of their concern. Keep on contributing.

5. They are pushing back on advisor fees. This is a natural response, especially if the market is not doing well. If you are resistant, you come across as part of the problem, not part of the solution. Boars Head, a familiar name in the deli meat world, has used the slogan “Compromise elsewhere.” (3) That implies “Don’t touch my fees.”

Advice: Bill Clinton famously said, “I feel your pain.” (4) You might discount your fees a bit, especially if the market is doing poorly, but try to attach a timeframe. The credit card “Zero interest rate” balance transfer offers only keep the rate low for a specified time period. Try to adopt the same logic. Also, suggest they have a similar conversation with their wireless and cable providers too.

6. They are going into debt to close the spending gap. This is a common problem. According to CNBC, 43% of Americans see themselves in this position, according to a 2022 article. (5)

Advice: This happens, but a sensible piece of advice is to ask your client to have a plan to pay off this debt. They might get an annual bonus or a tax refund check.

7. They are using airline miles and hotel points instead of cash. This makes great sense! Companies pay good money to incentivize customers to direct their spending or their travel. This can be used to pay for a vacation, at least partially.

Advice: Ask clients to do an inventory of point balances. Include both spouses. Ask them to look into expired points and miles too. It may be possible to bring them back to life, although at some cost.

8. They are putting off basic maintenance. This fits into several categories like home or car maintenance. It also involves spacing out dry cleaning and haircuts. This can be pennywise and pound foolish, as the saying goes.

Advice: How big are the savings from foregoing this spending? How about searing out a lower cost provider? There are always businesses competing to gain market share.

9. They are reluctant to slow discretionary spending. We spend lots of money on dinners out, going to concerts or films and shopping on weekends. We have been conditioned to believe “You cannot be having fun if you aren’t spending money.”

Advice: Entertain at home. Invite friends over. They should reciprocate. Seek out cheaper restaurants. They are out there. Give yourself an allowance for the weekend, paid in cash.

10. They are getting pressure to buy subscription services. Your favorite TV channels want you to subscribe. Can you turn on the TV without seeing a car warranty company ad? Charities want you to sign up for automatic debit donations. You must have friends who buy meal kits or online exercise program subscriptions.

Advice: Autopay makes sense in some cases. If you have monthly insurance bills, for example. They may give you a discount for signing up. Try to avoid many other subscription services. You may forget you have them or rarely use them. The charges keep coming.

When clients try to cope with inflation, they often take steps that end up costing them in the long run. This is an area where you can help them.

Related: The Rich Know Each Other