Do your clients have a budget?

Adds Prem Malik, investment advisor with Queensbury Securities Inc. in Toronto: “When clients get in financial trouble because they spend more than they make, they find themselves in one tough maze to get out of.”

When you help your clients put together a budget, they will be forced to look at areas in which they can cut back on expenses and focus on reaching their financial goals, Dally says.

Clients must be willing to work with you on budgeting because it requires making personal sacrifices. “The choices clients must make are usually tough,” says Malik. “They find it difficult to differentiate needs from wants.”

Below are some steps you can take to help your clients understand the value of budgeting:

– Identify income and expenses

List all income and expenses for a defined period – for example, monthly. Most clients will be able to identify their sources of income readily – usually their paycheque – and their fixed expenses, such as a mortgage or rent, utility bills and loan payments.

However, Dally says, variable expenses, such as food, clothing, entertainment and other incidentals often are “all over the map.”

In order to get a good handle on such expenses, have your clients diligently list all their expenses for a month. “Make sure clients understand the importance of this exercise,” Dally says, and let them know that you will be reviewing what they have recorded at the end of the month.

Malik suggests providing clients with spreadsheets to use to keep tabs on all cash, credit- and debit-card expenses for the month.

Once this exercise is completed, clients usually are surprised to see where their money goes, Dally says.

– Review cash flow

At the end of the month, review all income and expenses with your client. Discuss what expenses account for needs vs wants, and where cutbacks can be made.

Clients often resist making cuts, Dally says, but you must be able to show them that compromises must be made if they want to save for long-term goals such as retirement or buying a house.

“This becomes especially important if clients are fulfilling wants by getting into debt,” Dally says.

Malik believes this point in the process brings the “aha!” moment for clients who are keen to make changes.

“They might discover that they spend $10 a day on coffee or a pint or two after work,” Malik says. “Making cuts on wasteful spending gets easier when you know where to make them.”

– Draw up a budget

With the agreement of your clients, develop a budget that they can follow. Dally suggests creating a worksheet that outlines clear targets for expenses because income does not vary within a fixed period.

“If clients wish to spend more in a certain area, they must make cutbacks in another,” he says. Clients must be able to see the savings they are realizing in each period, and must know what the savings will be used for, he adds.

Some effective ways to help clients in developing a budget, Malik says, include identifying short-, medium- and long-term goals. Calculate estimated costs of those goals, assign target dates and the monthly amount from the expenses budget that can be put toward those goals.

For example, if a client is saving for a vacation next year that will cost $5,000, he or she could put the savings in a special savings account, which will create a fun family project. “Once family members experience results,” Malik says, “budgeting for another vacation will become a breeze.”

– Execute the plan

The ultimate goal of showing your clients the value of budgeting is to help them realize a long-term goal, which could be to increase their retirement savings, pay off debt or buy a home. Clients should use the savings realized to help fulfil this goal.

“Clients get a huge psychological boost when they see the results of their sacrifice,” Dally says. “Success can motivate some clients to do even better.”

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