An obvious mechanism to help an individual spend their cash flow in accordance with their financial goals is to employ some sort of budget. But for many of us the idea of constricting any type of behavior, especially the way in which we spend our money, is unpleasant. Even if we label it using the euphemism of a “spending plan.”
Volumes of advice and technologies are available to help with the mechanics of putting budgets together and tracking activity, but what about changing attitudes and behaviors that are critical to achieving success with a spending plan? How can a financial advisor help an adult client with this endeavor? How about an adult child working to help an aging parent? Or a spouse with a spendthrift partner? What if you’re an advisor working with a client that is more creative in spirit than debits and credits will allow? Maybe you’ve uttered or heard statements like this:
Budgeting is not her thing.
He’s never had a budget but now has to have one to meet his goals.
They love shopping: it’s a pastime and they don’t have any idea how much they spend.
Regardless of our hard-wired attitudes and preferences, the reality is that having a plan for spending cash flow (i.e., a budget) is a requirement for building wealth. It’s a surprise to many high-earners, but it’s true whether you earn $20K or $1 million a year. To overcome and alter negative attitudes and behaviors related to planned spending, there is no magic salve that can eliminate all of the initial perceived pain (and let’s be honest: if a client has never created a plan to govern his spending, there will be some initial discomfort). But there are different approaches that can make it easier and increase probability of success. Here are a few we’ve seen work:
Work together to create the budget: One of the biggest mistakes we’ve seen from both financial planners and for those managing their own finances is not involving all stakeholders in the creation of a budget. In organizations, this is called procedural justice: a feeling that you had some say in the procedures that were implemented and that lead to an outcome. In fact, even using templates can throw some clients off because it demonstrates a lack of appreciation for their unique point of view from the very first step. A better idea would be to brainstorm first, present a sample budget, and then work/modify/refine from there. In this approach every stakeholder’s voice and opinion is included at each step of the process. Note here: if you’re using financial planning software that requires your clients to input their budgeting needs, employing a brainstorming session before introducing client dashboards and portals can help with this point.
Communicate data in the language of the audience: Speaking of dashboards—they’re awesome, right? Because everyone loves lots of graphs with numbers and data and lines? Not exactly. In data presentation, one size does not fit all. Different types of information presentation creates different impressions and impacts us in different ways. Effective advisors add real-life stories to the data, numbers, and graphs: adding anecdotal evidence and case studies that make the statistics come alive. Numbers and graphs are great for your finance and accounting clients, but some of us need to hear the stories behind the data to make it real. Showing what happens when you increase or decrease spending in a certain category is helpful, but sharing a story of a real outcome or of a hypothetical (but tangible) projected future benefit resulting from a proposed course of action can create an even stronger impression.
Make the budget accessible: The budget, spending plan, consumption strategy, whatever you call it, should be accessible in multiple ways. If the client doesn’t know what constraints he is trying to live by at the moment of truth—that is, while walking the aisles at the mall or clicking through pages on Amazon—success will be unrealistic. Technology and apps can help with this, but this will vary by individual. Some may opt for and do better with text or email reminders (which may or may not be embedded in those apps). And even tech savvy households continue to have members that would rather touch a piece of physical paper than read something off of a Kindle or iPhone. When all else fails—and we know it seems somewhat remedial—we’ve seen individuals have success with a laminated “cheat-sheet” budget that is credit card sized. Whatever it takes. In budgeting, the ends usually justify the means.
Measure success along the way: If you’re working with clients to change consumption behaviors by using a spending plan it may be three months or more before you’re able to discern and discuss the efficacy of the spending plan. Yes, you might see the numbers, but the why behind the numbers, especially if they aren’t positive, can help you guide clients back to a better path. Check in regularly (and automatically) on specific goals: this is where technology can aid in behavior change.
Give them what they want: In the end, some of us just want a sliver of freedom to spend. Whether it’s in our upbringing or our experiences to date, we may have had the freedom to buy whatever we wanted, whenever we wanted. At least until the reality of a bad result was reached. For these individuals the imposition of a rigid plan for spending and consuming will be a fundamental shift in behavior, which will be challenging. But if there is a budgeted amount for that freedom, it can reduce the perceived confinement of a budget.
Don’t give up: Persistence is the game here, and as we’ve discussed here before, saving money is every bit as important as investment returns in building wealth. Even more so during the early years of accumulation. In the long-run it will be worth the struggle to find ways—even if through trial and error—to have a better-than-negative attitude about budgets, and to successfully use this powerful tool to guide spending behaviors.