“Money talks. It says goodbye.” What a great expression! Do you have clients who spend everything they earn? Do they use automatic debits to pay bills? Do they think the good times will last forever? This might be an inconvenient conversation you should really have with your clients.
Television can create unrealistic expectations. Clients watching programs like Downton Abbey realize although British people 100 years ago might not have been paid much, once you retired, Lord Grantham would give you use of a cottage on the estate and maybe a small pension. Those folks seemed to live modestly and get by. Enter into the middle of the 20th century and people would work until retirement and then collect a defined benefit pension, sort of like a salary in retirement. For whatever reason, some clients do not think about retirement, they just spend everything that comes into their checking account.
This problem can be taken to the next level when they put all their overhead bills on automatic debit to their checking account. Their mortgage payment, car insurance, wireless bill and power bill all get deducted from their account automatically. They are not saving.
The problem gets even worse when they see a shortfall in income vs. expenses and write a check from their Home Equity Line of Credit (HELOC) to cover the difference. They may also consider their credit cards as “extra cash flow,” charging dining out and vacations, running up more debt. They make minimum payments, which are another automatic debit to their checking account.
Here are some hard lessons clients living on cash flow need to understand:
1. Do you know how much comes in and how much goes out? Your client might know how much goes into their account from their paycheck and other sources, but do they know how much goes out? This should be answered on a couple of levels: Not only how much do they pay out, but what are they spending in charges put onto credit cards?
Tactful question: How much does it cost to run your life? Has it changed recently?
2. What happens if cashflow stops? This is a train wreck in the making. If they have auto debits hitting their bank account, they still expect to get paid even if your client loses their job or the one person business they own cannot meet payroll that month. That instantly creates a negative cash balance and bank penalty charges.
Tactful question: Do you have an emergency fund or access to emergency cash? It might be unlikely, but what would happen if your company reorganized and you were between jobs for a couple of months?
3. Your income can be cyclical, especially if you work in sales. People in sales are often optimists. When they have a good year, they assume this is the New Normal and the good times will last forever. Sometimes they assume their income will remain on an upward trend forever and they spend in anticipation of that income boost.
Tactful question: How has your income varied over the past five years? Has it always gone up? Have you had a slow year before? What did you do?
4. Where does your annual bonus go? Your client who is paid on the basis of salary plus bonus has an annual opportunity to reduce debt. They might think of their bonus as a vacation fund, but the debt they carry is not going to go away unless they stop spending or do something about it.
Tactful question: What did you get as a bonus last year? What did you do with it? What do you have to show for it? How much do you think you will get this year? If you consider it as a windfall, what will you do with it?
5. Where is your rainy day fund? This can tie into the bonus conversation. If they lost their job tomorrow, they would either need about six months of income stored away or access to a line of credit to carry them.
Tactful question: If you needed cash over several months in a hurry, where would it come from?
6. Do you have subscription services you rarely use? Everyone seems to want you to sign up to subscription services. This includes meal kits, TV programming, gym membership, car warranty programs and even charities!
Tactful question: How many does your client have? What is the cost on a monthly basis? How many do they use?
7. It is easier to save pretax dollars. Many people approach savings from a “pay yourself last” mindset. Saving money through payroll deduction pays you first, instead.
Tactful question: Your company offers savings opportunities like a 401(k) and stock purchase plan. Are you taking advantage? If not, why not?
8. Don’t leave money on the table. Is your client the type of person who picks up change or paper money if they see it on the sidewalk? If so, it is because it is an opportunity they do not want to pass up.
Tactful question: How much is your company prepared to give you if you use the savings tools they offer as employee benefits? Lets figure out that number together.
9. How much of your spending is discretionary? It is difficult to cut back on fixed overhead expenses. Landlords expect rent to get paid. The government wants it’s estimated income tax payments. You need to keep the lights on.
Tactful question: How much do you take out in ATM cash advances? How much do you charge to credit cards every month?
10. If you needed to reduce spending by 20%, how would you do it? This is an interesting “What if” kind of question. In politics, people talk about “sunset provisions.” Where a government program doesn’t run forever. It has a specified date when it stops, unless it is renewed. This is an approach for a client to consider where their money goes and what would happen if they needed to build a new, smaller budget from the ground up.
Tactful question: In most states, the legislature must pass a balanced budget. If your income is compared to your expenses, how would you bring expenses into line or increase your income if it was necessary?
11. What is the easiest way to earn 24% on your money? Does your client carry revolving charge card debt on their credit cards? Amazingly, as of September 2023, the average rate for cardholders with good credit is 23.99% APR! (1)
Tactful question: If you saw an investment with a guaranteed return of 24%, you would jump on it. It you have free cash available and carry a balance on your credit cards, you may be surprised to learn the interest rate is almost 24% today. What do you think you should do?
Living off cash flow means spending everything you earn. This is a bad approach to managing your money, but many people do it! It’s an awkward conversation, but a conversation worth having.