By Kevin Gibbons
Paul Sullivan recently wrote an article in the New York Times about how Merrill Lynch is helping rich clients budget “like everyone else.”
Merrill Lynch’s Center for Family Wealth Dynamics and Governance is creating a document for wealthy clients entitled “Considerations for Decision-Making around Expenditures.” They have found that their wealthy clients are looking for help determining how best to spend their money, even when they have a great deal of it.
At The Savvy Life we have been helping people with all levels of wealth, from annual incomes of $25K to a $1M or more, determine how to save and spend purposefully to meet their goals. In our work over the past seven years, we have helped some clients move from overspending thousands of dollars per month to saving thousands, while for others, we have simply helped them continue to live within their means and assured them that they can afford their current spending.
Mr. Sullivan writes that the guide looks at all aspects of spending, from lifestyle expenditures to big fixed expenses to irregular costs like home maintenance. He quotes a Merrill Lynch managing director, “When we’re looking at it in the broader context, it’s about balancing the different spending priorities.” We could not agree more. Money affects everything. It affects where and how we live, what food we eat, how we choose to dress and furnish our homes, what we do for entertainment. You have to look at all these areas to formulate a coherent, effective plan. You must also consider how regular (monthly) and irregular (intermittent) expenses affect cash flow and goal planning.
The Savvy Life’s Cash Flow Planning program does both by breaking down a client’s expenses into four broad areas: Monthly Essential Expenses, Monthly Lifestyle Expenses, Intermittent Essential Expenses and Intermittent Lifestyle Expenses.
Monthly expenses are fairly easy to track and control, because they occur on a regular basis and are serviced in close proximity to most people’s income streams. Most people get paid on the first and fifteenth of the month, and pay their monthly bills accordingly.
Separating “essential” and “lifestyle” expenses provides us and the clients with a framework to look at whether their money is truly going where they want it to go, and how to change that if it is not the case. It clearly breaks out how much they need for their critical expenses and how much is available for the things and experiences they want to purchase.
Intermittent expenses can be much more challenging for the typical client. Those expenses that occur once or twice a year often sneak up on people, and even if they have the best intentions, if they do not have a formalized, actionable plan for saving for those expenses, they may not have the resources to pay them when do. Even if a client is wealthy enough to cover these types of expenses, the uncertainty can lead to anxiety or unnecessary underspending. Again, looking at “essential” (insurance, taxes, maintenance) and “lifestyle” (vacations, gifts, home improvement) helps us prioritize spending to align with the clients’ goals and values. It also allows them to spend without anxiety, knowing those expenditures will not create consequences.
By time phasing these expenses with the clients’ incomes (regular salaries or disbursements, periodic bonuses or balloon payments – this is very common with real estate agents or sales people) we can craft a full cash flow plan that they can use throughout the year.
Budgets, spending plans, cash flow plans – all are tools for aligning a client’s spending and savings to their goals. Spending and saving with purpose should be the focus of all these plan; but they are only useful if they are living documents, accompanied by actionable implementation strategies. A true, functional spending plan should clearly show the client how to live to the plan, should have provisions for periodic updates and reviews, both as situations change and as the client learns which implementation strategies actually work well, and, most importantly, must have strong client buy-in. Properly formed, these plans are valuable for clients of any wealth level, for either modifying their spending and saving behavior to align with their goals, or to provide reassurance that they are living to their plan and can spend accordingly.
For information how The Savvy Life can help you and your clients create, live to and maintain spending plans, visit our website at The Savvy Life.com.
Kevin Gibbons is the Chief Operating Officer of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past eight years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 525 individuals and families to create Spending Plans.
They also work with financial advisors and their clients doing cash flow planning as well as giving Savvy Living presentations via webinar and in-person to audiences across the U.S.
If you’d like to learn more about how Kevin and Melissa work with clients, visit The Savvy Life’s Programs page.
If you’d like to learn more about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page