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Many Americans spend everything they earn. Some spend more, running up credit card debt. This behavior makes saving for the future very difficult. They consider potential savings as “what they have left” after paying bills. Often that is nothing. Putting on your financial planning hat, how can you teach clients to save?
How to Spend Less:
1. Adopt a budget for weekend spending. It makes sense for everyone to have a budget. Although people in industry measure “projected vs. actual” all the time at work, their personal finances might be more casual. It makes sense for a couple to give themselves an “allowance” for the weekend. They determine how much goes towards Friday night drinks, Saturday night dinner, theater tickets and charitable contributions. Saving money can almost become a game.
2. Cash is king can mean many things. “Paying with plastic” is abstract. Many of us have EX Pass or a similar toll payment system on our cars. Does anyone know what highway tolls cost? Probably not. It is difficult to track your spending if you don’t pay attention to how much you are spending. This is radical. Turn your “weekend allowance” into cash. When you are going out for drinks or Friday or choosing your entrée on Saturday night, you are very aware of how much this is costing and mow much you have left.
3. Before buying something, put it down and leave the store. This is a psychological strategy. Let us assume you are in a shopping mall. You are at a clothing store. You find a garment you like; the size is right and the price is attractive. Put it down, walk out of the store and do something else for 15 minutes. Now determine if you want to return to the store and buy the item. Often, the “moment” has passed.
4. Treat loyalty rewards as an alternative currency. You earn airline and hotel points when you travel, but also when you shop. These points are often transferrable, not unique to one company or credit card. Learn how this works. When planning a vacation, learn how much of the expense you can offset by spending your points. Consider transferring between programs or buying a few more. This can reduce the cash outlay for your vacation.
5. Before borrowing money, know how you will pay it back. Home renovations can be expensive. You can do research online and learn how much value certain home improvements add to your dwelling if you chose to put it on the market. Your strategy might be to recoup the expense when you sell your home. What if it is your “forever home? Have a plan to pay down debt. Don’t borrow money with no idea how it might be repaid.
6. Redefine “Keeping Up with the Joneses.’ Many of us are competitors. If A is an art collector, B is a wine collector, C has an exotic car and D has a boat, sometimes we attempt to buy art, wine, an exotic car and a boat to compete with each. Take a step back. A has art, but no wine, exotic car or boat. C has their exotic car, but couldn’t care less about art, winer or a boat. Pick one category that will be your specialist interest. Do not try to compete with everyone. The cost will ruin you.
How to Save More:
1. Adopt the attitude “Pay yourself first.” An accounting professor in the Midwest credited his prudent financial behavior as “I want my future self to be happy with what my present self has done.” Building wealth takes time, but compounding has been considered one of the “Wonders of the World.” Discipline yourself to put savings dollars aside first, before paying bills and discretionary spending.
2. Pretax dollars are easier to save than after tax dollars. This means payroll deduction is an effective way to save. You might see your monthly paycheck is smaller at the start of the year because you are contributing to Social Security and workplace retirement plans. Later in the year you might max out on both and your take home pay is higher. Psychologically, we find a way to “make it work” when the paycheck amount is smaller. What savings options do you have at work that can come straight out of your paycheck?
3. Put money aside, but where you can get it quickly. Financial advisors know some clients are afraid to “lock money up” even if it is unlikely they will need it for decades. Does your firm have a program where employees can buy company stock at a discount with no required holding period? Although you are at risk of stock price volatility, this is money that is invested, yet can be turned into cash at current prices if necessary.
4. Save your raise. A marketing manager in California came up with this idea when advising his children about budgeting. It makes sense. You are used to living on a certain income level. Suddenly it has gone up. Stick with your current spending and save that bump up in your paycheck.
5. Do not pre-spend your annual bonus. There’s a great expression: “Money talks, it says goodbye.” When you get an annual bonus at work, it is tempting to spend it having fun. Using it to pay down debt is a wise decision because the interest rate you are paying on money you owe is far higher than banks pay depositors. If you can afford it, a sensible approach is to consider your bonus as an influx of cash that is ideal for investing.
Getting your personal finances under control does not need to be similar to a starvation diet. It can be approached in a logical way that includes buy in from the client.