Getting Clients to Budget, Cut Spending

NEW YORK--Even the most ingenious financial plan can seem almost worthless if a client spends excessively.

And for clients who refuse to adopt a budget plan, the results can be disastrous--especially in their retirement years.

With that in mind, advisers weigh in on how they prompt clients to cut spending, and when they can, buy into budgeting:

Play the Numbers Game

Lauren Lindsay, director of financial planning, Personal Financial Advisors

On clients' resistance: If you tell clients what they can (or can't) spend money on, they likely won't listen. "Just like a diet," Ms. Lindsay says.

The strategy: Ms. Lindsay plays the "1,2,3" game with clients. Expenses clients rank as "1s" are those they can't control such as taxes or maybe a mortgage payment. Expenses ranked as "2s" are those they perceive that they have some control over such as groceries. Those ranked "3" are expenses where they have total control over--like a vacation.

The goal is to have them review their expenses and reduce the 2s by 10% to 20% and the 3s by 20% to 30%. This exercise often helps folks change their perception of what they can or can't change in their spending habits. "Perception is everything," she says.

Think Long Term

Gary Alt, partner, Monterey Private Wealth

On clients' resistance: Money spent today provides immediate gratification which often makes it difficult for folks to budget. "Saving for the future doesn't give us the same emotional lift," Mr. Alt says.

The strategy: Advisers have to help folks "level the playing field" by tying the effects of spending today to a larger, more important goal, he says. A boomer doctor couple he worked with had a beautiful six-figure home but what they really wanted to spend more time outdoors fly fishing, camping and whitewater kayaking. Mr. Alt did an analysis and it turned out the husband had to work 10 months of the year just to maintain their home, all while missing out on the outdoor trips the couple longed to do. "Once put in that context, they easily made the decision to sell their home and downsize so they could enjoy their life," says Mr. Alt.

Help Them See Trade-Offs

Clarissa Hobson, senior financial planning adviser, Carnick & Kubik

On clients' resistance: Inertia can play a big part in some clients' resistance to budgeting. When people are told they need to take certain actions within their budget such as getting quotes for their insurance policies to potentially reduce their premiums, they simply don't do it because it requires them to do something they're not used to doing, Ms. Hobson says.

The strategy: At first, Ms. Hobson was surprised to learn that his clients were spending $25,000 a year at an expensive grocery store when they really couldn't afford to do so. However, she learned that they loved hosting dinner parties and eating well, so this spending was very important to them. In turn, she helped them determine they needed to cut their overall household spending by 40% to meet their retirement goals. But she left it up to them to pick the categories in which they would make cuts. In the end, they decided to make some cuts to their grocery budget but most of the cuts came from other areas. "It's not helpful for me to tell them to stop spending altogether in a specific area. They need to decide that for themselves," she says.

Don't Even Try It

Derek Tharp, wealth manager, Mote Wealth Management

On clients' resistance: Mr. Tharp rarely has clients create budgets anymore. "We found that not only was the process about as enjoyable as pulling teeth, most of the time the results weren't useful anyway," he says.

The strategy: Mr. Tharp now makes the assumption that clients are spending 100% of their income unless they can show him otherwise. He'll take their gross income, remove taxes and any savings, and assume the rest is expenses. If he is working with clients who are having cash-flow issues, he's found it's helpful for them to look at their expenses and see what they can account for. Anything that can't be accounted for is likely spontaneous spending on, say, dining out, clothing and entertainment. He also strongly recommends clients have money deposited directly from their paychecks into their savings accounts to head off the urge to spend right away.

"It will reduce the amount of discretionary cash they have in their bank account and often they naturally make reductions in their discretionary spending," he says.