What’s a financial advisor to do when a couple earns $250,000 yet is mired in debt due to rampant credit card spending on luxury cars, Caribbean vacations, and Rolex watches?
Tough love seems a sensible response. However, if the “love” is too tough, the client may leave. But if the love isn’t tough enough, the client may not reach its goals.
Most advisors have developed their own approaches for handling extravagance and an inability to save. They should also acknowledge clients’ unique psychological needs while recognizing that most people are hardwired to spend.
“According to the psychology of spending, if people have access to their money or see it available to them, they will spend it,” explained Robert Gauvreau, partner of Toronto-based accounting firm Gauvreau & Associates, and partner of Venture North, a business incubator.
Most client spending is “unnecessary” Gauvreau says. “They’ll buy a new purse or shoes, or watch.” And the more they make, the more they’ll want. Aside from not adequately saving for retirement, without adequate savings, the loss of a job or other hardship could prove financially devastating.
Gauvreau’s solution: “Implement a forced saving plan that is automated that you don’t have to think about.”
Clients can start with pre-authorized monthly bank transfers of say $100 or $200. “Most don’t even notice,” he said. “It’s getting the discipline of taking money out and putting it aside. You learn to live without it and then can start increasing it.”
Then Gauvreau looks to boost a client’s saving. An entrepreneur making $200,000 annually, who is taxed at a 40% rate, takes home $120,000. If the client saves $1000 a week or roughly $50,000 a year, there’s $70,000 remaining for disposable income.
“The key is for someone making more money, instead of spending more, you put more money away,” Gauvreau stated. If the client feels deprived about saving too much, the advisor cuts them slack. “We’re trying to encourage people to live life on their own terms.”
Psychologist Moira Somers, who wrote Advice that Sticks: How to Give Financial Advice that People Will Follow, noted that for some, buying things, and anticipating doing so, produces a euphoric dopamine burst.
Somers said “a fear of having to do without, a desire to keep up with the Joneses” and “a kind of numbing that can happen when you get into a mall” all help explain overspending. She recommends that advisors and clients see eye to eye. “Often clients don’t view it as a problem. In extreme cases, it’s like addiction. And people who are addicted don’t respond well to lectures.”
Like Gauvreau, Somers argues for automatic savings and payments. She recommends changing behavior one step at a time, such as cancelling overdraft protection or buying only with debit or cash.
Financial therapist Bari Tessler who wrote The Art of Money: A Life-Changing Guide to Financial Happiness, said that because most people lack financial literacy she teaches clients how to be savvy about money.
For example, one of her clients was a bookkeeper who was good with numbers but couldn’t control her spending. “In the moment, she couldn’t make a good money decision. She wanted what she wanted.”
Tessler taught her to devise a bookkeeping system to scrutinize her spending. The accountant determined what values meant most to her, and spent accordingly.
“She’d catch herself and ask, ‘Do I have this cash flow, and will this align with my long-term goals?’” Tessler said.
Nancy Hite, a Boca Raton, Fl.-based CFP who runs The Strategic Wealth Advisor, refrains from being negative with clients and avoids words like “budget.” She said “most people can’t stay on a budget any more then they can stay on a diet.”
Instead, Hite pushes for incremental behavioral changes to address overspending. Hite has clients track expenses on their smartphones. In doing so, a weekly $50 Starbucks habit can be replaced by home brewing.
Somers says advisors need to “develop curiosity, empathy, and helpfulness. Judgment is a relationship killer. In the most extreme cases, they need to consider referral to a therapist.”