Budgets are like nutrition plans: Everyone agrees they are a good thing, but no one size fits all. Any accounting professional practicing financial planning can draw up a budget for a client, but it’s useless unless the client sticks to it. It is times like these when the accountant should step in and help their clients with the tremendous task of saving money.
You have heard the old joke: “How many psychiatrists does it take to change a light bulb? Just one, but the light bulb really has to want to change.” Many clients spend all (or more) of their income. They go into debt when there is a shortfall. While it’s easy to rack up debt, it takes a lot of effort to get rid of it.
Here is the situation many clients face when it comes to budgeting: They do not have a budget and feel they do not need one because they are earning plenty of money. As their income rises, so does their spending. They assume the good times will last forever. They are good American consumers, meaning they’re poor savers. When they run into a reversal like a job loss, their spending is still going at full speed even though their income has stopped. They go deeper into debt.
Children copy their parent’s behavior. If the parents spend impulsively and go into debt, their children will follow the same pattern, continually asking their parents for money or handing over the bills. The problem intensifies.
Before you can introduce a budget that your client will take seriously, you need to take steps to change their financial behavior and get their buy-in. A good first step is to increase their awareness of the enormity of the problem. Ask them to provide a year’s worth of checking and credit card statements. It will take time to analyze and organize the data, but you can put together a picture of where their money goes and how it matches up against their income.
One of the likely outcomes is they are increasing their revolving charge card balances year over year. What is this costing them? You should be able to make the case that their discretionary spending is getting out of control. Put another way, they are spending more than they think they are.
To help paint a picture for them, create some graphics that show what they spend in a weekend.. For a couple living in the city or suburbs it can easily top $400. They will be surprised. Show them the costs of Friday dinner out, grocery shopping, dry cleaning and charitable giving add up. Everything is paid by check or plastic. Suggest they try taking out $400 in cash before the weekend and paying for everything with cash instead. This should remind them of their childhood, when they were given a weekly allowance and that was all they got.
Here’s why this works: Paying for drinks and gasoline in cash makes you more conscious of how much you are spending because you are handling physical money. Paying by credit card or tapping your phone is abstract.
Your client needs to equate saving with paying themselves first. Many people wait to see what is left over before they consider putting money away for savings. Unfortunately, immediate spending always takes priority over moving some of the money over to your savings account. There is an accepted logic that people will find a way to live within their after-tax paycheck, so it makes sense to have savings taken off the top as payroll deductions.
The first and most logical one is their 401(k) contribution. They should be putting away the maximum to take advantage of their firm’s matching contribution. If they work in the private sector for a listed public company, they should consider enrolling in the firm’s Employee Stock Purchase Program (ESPP). Generally speaking, they can put aside money each month that buys stock in their company at a discount. It might take place on a quarterly basis. The stock is now theirs. They keep it as savings or can sell it, making money on the difference between the discounted purchase price and the current value.
If your client can live within their paycheck, there are other ways they can earmark cash for savings. Let us assume they receive periodic salary increases. Suppose they direct the extra cash in their paycheck to savings. They might have the type of job that pays an annual bonus. This cash can be used to pay down high-interest debt or be directed into savings. Their annual tax refund check can be put to work, too.
If your client is willing to accept this level of financial discipline, they should start to see their savings grow dramatically. Combined with retirement planning, they can set financial independence as their long-term goal. Reviewing their investment portfolio on a quarterly basis makes sense because it should align with the delivery of their company stock through the ESPP.
By this time, your client has achieved two major milestones. They are paying themselves first through payroll deductions, and they are living within their paycheck. They might have to tighten their belt a bit and not spring for that new pair of sneakers they don’t need or impulse buy a streaming service, but it’ll be worth it in the long run.
Once they get going with this, you can help your client optimize their spending category by category. You will be helping them develop a realistic budget they will make an effort to follow.
