How spending money leads to wealth

The holidays are around the corner. With that comes more trips to the mall as clients purchase gifts for friends and family. This increased spending may make you want to tell a client to get a hold of his finances if he comes in looking to cash in some investments to pay off debt.

But telling him to cut back and hold on to his savings might actually create a barrier in communication. You’ll be telling him the thing he intuitively knows but doesn’t want to hear. He’ll think you’re judging him. Worse still, he might feel like you don’t support his lifestyle choices, and will be intimidated to open up to you in the future.

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Of course, this doesn’t mean you should tell clients to purchase what they want, when they want just because they have the funds or credit to pay for it. Instead, a discussion about spending should always coincide with one about income.

Your role is to ensure he has income to fuel his spending today and tomorrow. This means teaching him how to spend intentionally, while also increasing wealth.

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The key is to put as much as possible on autopilot, including bank deposits and transfers, as well as bill payments so the client feels more at ease with money management. Create a contingency plan that doesn’t start with the typical “saving three months of expenses.”

Here’s how.

1. Look at how much money is needed each month, and what it’s currently being spent on. If buying organic groceries is important to a client, then the weekly and monthly cash flow has to account for this. This way, spending from cash flow (instead of from credit) becomes more intentional.

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2. Create an earnings allocation strategy so your client knows how much will be allocated towards his immediate, mid-term and long-term goals. Again, you’ll get resistance here because the common response is that it doesn’t make sense to allocate money for desires when every dollar coming in is already allocated.

3. Establish a banking platform. Guide him through what type of accounts are best, which credit cards make sense (based on interest, income and payment options), and which bills should be paid from which accounts.

Of course, bank accounts might not be in your portfolio of financial products, but that’s not the point. Neither is the various features and benefits of the specific accounts. It’s about how they’re used by your client. Your positive influence on managing his money will be reinforced every time he reaches for his wallet.

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For instance, one account could be used for income deposits and bill payments. Another could be used for discretionary spending. Show him how to apply his earnings allocation strategy, so money is automatically moved from the main account to a cash account for day-to-day spending. It’s also a good idea to set up holding accounts that pay higher interest for longer-term goals.

And show him how to organize his credit cards in a debt snowball.

For instance, say your client earns $5,000. If he’s pre-determined that 5% is allocated towards long-term independence; 5% towards non-deductible debt reduction; 10% towards gifts, giving and causes; 10% towards lifestyle; 35% towards living expenses like food, gas and clothing; and 35% towards bills like his mortgage and utilities.

If he’s short in any area, the contingency plan could take first from the lifestyle allocation, then the long-term funds, and finally from credit cards. But he has to be the one to pre-determine which allocation to draw from.

When you do this, you’ve shown him how to manage risk. This process helps the client reduce debt and save more, without feeling like he’s sacrificing spending.

Tracy Piercy, CFP is the founder of MoneyMinding. She is an author, speaker and financial educator providing books, training, courses and materials for both advisors and clients to help create sustainable income and increase financial capacity.