Help your clients prepare for the unexpected

There are many reasons why clients experience a shift in their expenses. The holidays are a prime example. But there are plenty of more mundane expenses – appliances that stop working, car repairs and the like.

Small changes won’t take their financial plan off track. But over time, larger or more frequent changes in monthly cash outlay can wreak havoc on personal finances.

They can even keep your client from reaching important goals. Bear these fluctuations in mind when crafting financial plans.

Seven ways you can help:

1. Set up or top up emergency savings

One of the best ways to protect clients from variations in their expenses is to ensure they regularly top up their emergency savings account. Even if their rainy-day fund has the recommended four to six months of expenses set aside, advise them to budget for a regular contribution.

Don’t just mention that they should be saving for emergencies. Write it into the plan, and follow up to ensure they are saving the amount they’ve committed to.

2. Set up savings for predictable fluctuations

Predictable expenses make scheduled planning possible. Besides the holidays, this can include extra spending for vacations and annual expenses like auto insurance and children’s recreational fees.

Ask your client about these financial commitments when completing or updating the plan. Turn the total annual cost of these infrequent expenses into a monthly payment that’s directed into their savings account, so the funds are there when the bills come in.

3. Don’t plan down to zero

All plans need wiggle room. If every cent of available funds is put to work, it’s almost certain to fail. Things change. Some expenses vary over time, and the timing of charges can shift too.

A client without a regular cash flow buffer could easily give up on their plan because it will feel impossible the second something doesn’t go quite as expected.

4. Check statements monthly

Encourage clients to check their bank and credit card statements regularly. This is easy to forget because everything is electronic, and there is so much information to navigate each day.

Clients who make it a habit to review financial statements can save a bundle. They’ll catch fraudulent or incorrect charges and billing changes. The practice also encourages them to track their spending each month.

5. Audit regular bills annually

Clients should audit their bills at least once a year, looking for things they don’t value and could cut.

Streaming services are a great example. They started out as a cheaper way to access entertainment. But the options have expanded to the point where they now rival what we pay (or used to pay) for cable.

These services can be easily turned off and back on. Recommend that clients consider rotating services rather than subscribing all at once.

Regular audits will help clients spot changes in expense trends, which can be applied to their financial plan during the regular review process.

6. Help them hide a raise from themselves

Behavioural economist Shlomo Benartzi, who co-founded the Behavioral Decision-Making Group at UCLA Anderson School of Management, developed the Save More Tomorrow program with Richard Thaler, the Nobel Prize-winning professor of behavioural science and economics at the University of Chicago Booth School of Business. Together, they proved that people will put more away when you ask them to commit to increased saving in the future.

This helps disrupt present bias; the tendency to value quick rewards over things we have to wait for.

The program asked participants to commit to automatically increasing their savings rate each time they got a pay raise. They were enrolled in the program until they chose to opt out. Save More Tomorrow was incorporated into the U.S. Pension Protection Act in 2006. It has helped millions of people save more money for their retirement.

Advisors can leverage the same principle by having clients commit to an increase in savings every time they receive a raise.

7. Help them adjust their plan when they enjoy a windfall

Windfalls, such as tax returns, inheritances or property sales are all good examples of things that should spur a client to contact you. Using windfalls to top up their financial plan is one more way that you can protect clients from unexpected expenses.

The worst-case scenario is that your client ends up saving more than they need for emergencies and fluctuating expenses, and they temporarily have too much cash. That’s a genuine issue, so schedule a regular check-in and add this to the agenda. Reallocate excess funds to other financial goals as required.