Does Your Client Know Where Their Money Goes?

You can’t invest if you have no money. You cannot save either. As a financial professional, you help people with financial planning as part of your job. This can extend into budgeting. Surveys show people want financial education. Unfortunately, some of the sources they find on their own might be trying to sell them a product, using “financial planning” to create a need for a certain product sold by the firm. You can help your friends, prospects and clients by talking about financial planning. You might be taking the long view, but they might become clients or be a source of referrals.

A good place to start with friends (or anyone) is to ask: “Do you know where your money is going?” It likely gets spent in several categories:

  1. Payroll deductions. This is money that disappears before it even becomes your money! In addition to income tax and social security deductions, there are probably deductions for the retirement savings plan at work, health insurance and maybe union dues. How much comes out? Where does it go? Do you pay attention to how your 401(k) is invested? 25% or more might be taken off the top. (1)

  2. Shelter related overhead. Your friend or client pays rent or makes mortgage payments. If they own their own home, they have homeowner insurance, power bills and property taxes. These expenses must be paid to “Keep a roof over their head and keep the lights on.” How much are they?

  3. General overhead. They have a wireless plan. They have car payments. They have insurance policies. They might use a lawn mowing service and buy heating oil. They buy groceries, but we will get to that later. What bills must be paid every month that are not related to shelter?

  4. Credit card charges. This is a large category, because most people “put things on plastic” or buy now to pay later. The average American has about four credit cards. (2) Splitting spending down by category can be tedious, but you want to know how much is spent dining out, buying groceries, paying for gas and buying new clothes. Many people might think they are living within their means, but really putting excess spending on credit cards, building up a large amount of short term debt that is not actually short term.

  5. Cash advances from ATM machines or debits. People need walking around money. They visit the ATM from time to time. How much do they take out in a month? Do they know where it goes? Probably not.

  6. What automatic debits come out every month? These are charges for services like cable tv, subscription services. This also includes places where you have written checks to pay bills. The checking account statement is a great document for tracking these charges.

  7. Interest paid on consumer debt. This is not a separate bill identified as consumer debt, but it is the majority of the monthly minimum on each credit card payment. Do they know the interest rate? Do they know how much they pay in a year? Do they kbnow unlike some other forms of debt, there are no tax advantages?

  8. Charitable contributions. Although your client’s spending might be getting out of control they might still be generous to others. Regulart contributions to their religious institution is one example. They might buy tickets to charity galas, an opportunity rto dress up. They might have signed up to charities where they make an automatic monthly contribution. Charitable giving is good, but they should know how much they are giving.

  9. Recurring large expenses. Private school and college tuition are good examples.

  10. Allowances. Your children might be off at school, but they are probably not earning any money of their own. They may have graduated from college, found jobs in the big city, but do not earn enough to live independently. You might help with their rent or send them folding money. How much is that?

  11. Large, one-time expenses. Your client takes vacations. The roof needs replacing. They added new rain gutters. Their car needed major repairs. Their child got married. They celebrated a major anniversary. These are often one time expenses, but they are often unplanned and financed by debt.

  12. Other expenses. You have tried to be through, but everyone’s situation is different. Your client might smoke. What does that cost them? They have credit cards granting perks, but each card has a $500 annual fee. They might buy at auction or constantly watch some home shopping or jewelry channels on TV. What do these outside interests cost them?

This analysis will give them a good picture of the true cost of their lifestyle. It can also help with retirement planning, if they are unsure how much they are spending in retirement. Knowing where their money goes is the first step towards living within a balanced budget.



Related: Do Clients Understand the Dangers of Living on Cash Flow?