Let’s face it, managing money isn’t easy. Some clients and investors are better with it than others. Some are savers, some are spenders and others are the extreme of both. Here are five common money mistakes planners see from their clients and what they do to right them.
- Do you even budget? “Most folks really don't have a pulse on how much they spend in a typical month. Not everybody needs a detailed budget. But you could certainly make the argument that everybody – even Bill Gates – should know their monthly burn rate,” said Robert D. Greenman of Portland, Ore. If your clients don’t have a handle on their spending, create a thoughtful budget with breakdowns so clients can see where and how much they are spending.
2. CFOs only. “Divide and conquer household tasks and let just one spouse handle the family finances. This set-up may work fine until there’s a divorce or death and then the non-CFO (chief financial officer) spouse is left grieving and scrambling to find account statements just to understand what is owned and what is owed. And don’t get me started on the stress around finding usernames/passwords for online accounts,” said Patti Black, a financial planner from Birmingham, Ala. “I encourage both husband and wife to come in for meetings, not just CFO, so each has equal access to information. And equal say in what is being done!”
3. Splurging Unexpected Money. “One common mistake I see people make is having a certain attitude toward money that is received through any other way besides a standard paycheck. Whether that is through a tax refund, an inheritance, a gift or a bonus,” said Mackenzie Richards of Bari Investments in North Kingstown, R.I. “When we receive unexpected money, there is often a feeling that since we were doing just fine without it, it's OK to splurge on a gift for ourselves, or otherwise to essentially throw this money away. What we should be realizing is that this money is just as useful to us as if it came through our paycheck. If we received it like normal, we would probably save a portion, pay down some debt if we have it, and spend a portion as well. It's helpful to reframe the situation and realize that even though the money you received was unexpected, and this doesn't mean that you can't treat yourself a little bit, but that it is still your money and can help you achieve your financial goals, whatever they may be.”
Glenn Downing of Miami, Fla. said the same mentality occurs with income taxes.
“People like a big refund check, but that check is simply a refund of an overpayment of income taxes, returned to you with 0% interest! Too often the refund is looked at as found money, and simply spent,” Downing said. “We'd much rather see our clients adjust their income tax withholding to take the maximum in their monthly paychecks and use the additional funds directly toward achieving their financial goals.”
- Rebalance & review for market changes. “Since the stock market is reaching all-time highs, people may not realize that their exposure to the stock market has increased, and now they are taking on more risk than they have planned,” said Sean Miranda of Louisville, K.Y.
“Unfortunately, some people do not simply review their beneficiaries routinely. Everyone's lives change, whether it is a new baby, death, marriage, or divorce. Each one of these life changes may alter who you want to inherit your money, so it's important to review your estate annually, including investment accounts and life insurance.” Check in with clients regularly and find out about any life changes that could impact planning documents and insurance needs.
5. The market is a scary place, but so are low-interest accounts. Jon L. Ten Haagen of Huntington, N.Y. says clients often leave money in low, or no-interest savings accounts, not because they will need the funds sometime soon, but because they fear the ups and downs of the market.
“You have to sit them down to see the big picture. They do not need the money in the near future because it is earmarked for retirement (10 or more years out) and explain that if we properly diversify their assets than it will not all disappear down a dark hole. It works with the majority of folks.”
AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.