EFFICIENT PLANNER
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Cash Flow Rules That Help Clients Reach Their Goals
By Linda Leitz
Delving into the minutia of what a client spends might not be the primary focus—or the most exciting part—of financial planning. But if clients lack the cash flow to implement their plans and reach their goals, financial planning is an effort in futility. Sometimes clients are embarrassed about what they spend money on. And sometimes they have no idea where they spend, but they know they always seem to come up short. There are plenty of ways to approach understanding a client’s spending and getting them on a budget.
Working with an AFC®
One way to document clients’ spending and help them stay on track is to engage a budgeting professional like an Accredited Financial Counselor (AFC®) who can focus on the details. Tiffany Hays, AFC®, CHFC®, advises clients on budgeting, getting out of debt, and general financial principles through her practice, Fox-Hays Financial Counseling. She starts with a basic spreadsheet to capture clients’ primary spending tied to their pay schedule. Once they have collected that data, she has them move it into an app (see list of apps below). Next, she helps them set up reminders in the app so that when bills hit, they’re ready to pay them. Then she checks in with them every one or two months on their progress and to work out kinks in the budget. She also spends time helping them categorize their expenses so they can see where they’re spending money and where they’d be comfortable cutting back.
Hays helps clients use the app in a way that develops accountability to their budget, with the reminders keeping them on track. She’s also found that some clients benefit from having separate accounts for separate goals—one for buying a car, another for vacations, etc. This budget consulting can be for a limited time frame to get folks on track, or it can be long term for people who’ll benefit from ongoing input.
More Techniques
Jamie Lynn Byram, Ph.D., CFP®, AFC®, a financial planner with Locker Financial Services LLC, also has extensive experience helping people get on a workable budget. Similar to Hays, she sets up a spreadsheet with basic categories. She believes in drilling down to the details: groceries, gasoline, eating out, alcohol/cigarettes, subscriptions, medicine, dry cleaning, haircuts, manicures, clothes, hobbies, children’s activities, holiday gifts, etc. She leaves blank lines for her clients to fill in categories that are specific to them and to give flexibility for changes. The spreadsheet also shows their take-home pay and subtracts their fixed expenses (rent/mortgage, utilities, healthcare, etc.). This lays a foundation for moving into financial planning discussions on goals such as retirement, vacations, and debt reduction.
Byram also has clients keep a spending diary. She suggests a minimum of three weeks of detailed tracking. Writing down expenses makes clients more aware of what they’re spending. She recommends letting the client drive the conversation around their spending habits. By being nonjudgmental and listening to them talk about what they spend, we can learn about clients’ priorities. Building their spending around what’s important to them leads to a higher likelihood that they’ll stick to a budget.
Byram shared the example of a client who goes through the Starbucks drive-thru every morning during the winter months to get coffee on the way to school:
It is a lifeline for them. They spend around $35 a week on coffee. They only do this in the winter months—about three months a year. In their budget, we didn’t nix the coffee, but I had her add a line to her annual budget for the coffee, and it breaks down to $35 per month so that when the winter months arrive she has money in savings to cover the expense. This stopped the guilt and shame because she was prepared.
Dani Parris-Exline, CFP®, AFC®, a financial planner with my firm, Peace of Mind Financial Planning, finds benefits in keeping things simple. She provides alternatives to see what works for the household. If she works with a couple, they can combine finances or keep them separate. If they want to have some separate funds—yours/mine/ours—while sharing joint expenses, she offers the possibility of contributing to joint expenses in proportion to their incomes. In terms of the actual cash flow tracking, she’s a big fan of apps.
There’s an App for That
Parris-Exline, Hays, and Byram have suggestions for apps that have helped with setting a budget and spending. Some of these apps are better known than others.
- Mint is a free app that allows for manual input of a budget and will download transactions from bank accounts and credit cards to track spending in real time.
- You Need a Budget (YNAB) is a paid app that uses a zero-balance budgeting philosophy and can be synced with bank and credit card accounts. It does have a bit of a learning curve, but it gets good reviews.
- Honeydue is a free app designed specifically for use by couples and allows for account syncing. It offers a joint bank account, which is not required to use the app.
- Zeta is another free app designed specifically for couples that allows for account syncing. It also offers a no-fee bank account that is not required.
- Quicken is a paid app that’s available in both a desktop and online version that allows management of finances and some planning tools.
- Simplifi is a paid Quicken app that is interactive with bank and credit card accounts and that tracks spending and goals.
The Unbudget
Some people spend substantially less than what they make and amass savings, but they don’t know a breakdown of what they spend. And maybe they don’t need to know, says Bert Whitehead, founder of the Alliance of Comprehensive Planners.
Whitehead uses a tax return along with a review of liabilities to determine a client’s rough total of annual spending. Taking the taxable income and subtracting the tax will yield an estimate of what is available to spend. If the client isn’t accumulating debt, they are living within their means. If they are building after-tax savings, then the amount they’re adding to their savings is how much is left over after their spending. Whitehead’s point is that for those who are building savings, having their financial planner require them to account for how they spend their money might not be productive.
Professional Fiduciary Duty
As CFP® professionals, when we engage in the financial planning process, we need to gather adequate data. Determining a spending pattern can tell us a lot about our clients—and having accurate information is integral to valid financial planning. We can use processes, apps, and outside experts to help us gather this important information.
Linda Leitz, Ph.D., CFP®, EA, is a NAPFA-Registered Financial Advisor in Colorado Springs, CO.
image credit: istock.com/Chainarong Prasertthai
