How to advise your spendthrift clients

You probably know a spendthrift, someone who seeks instant gratification, takes an expensive vacation, or renovates their home by writing checks on their home equity line of credit while their credit card balance continues to grow. These people can be your neighbors, your friends or even your customers. If the latter, what can you do as an accountant to avoid disaster?

Before you answer this question, consider an old joke:

How many psychiatrists does it take to change a light bulb?

Only one, but the bulb must want to change.

Getting a spendthrift client to change their habits can be an uphill battle, but one worth pursuing.

Why is your client spending money like water?

Maybe your parents raised you to be careful. You know that working, saving and investing are the path to financial independence in retirement, if not sooner. However, some customers didn’t get the message. Why not? Here are several possibilities:

They think the good times will last forever. Maybe they’re relatively young and earn a good income (maybe even a two-income household) and don’t have kids (yet). They might assume that their income will continue to increase indefinitely and that they will always have a job.

They rely on the stock market. Perhaps they have an investment portfolio that has been doing well for over a decade. Every month they look at their statement and say, “Look how much we earned this month!” They might assume that the rise in the stock market will last forever.

They view available credit as money they can spend. Years ago, I saw a T-shirt that said, “I can’t run out of money. I still have checks left! When these clients’ checking accounts or cash fund balances are low, they can tap into their net worth line to make up the shortfall. They’re probably only making minimal payments on their credit cards, and the credit card companies, for better or worse, keep increasing their credit lines.

They feel patriotic while spending. This well-intentioned action can have negative consequences. These customers could streamline their restaurant spending and renovate their homes to support local businesses. They feel like they are doing their part to help the economic recovery.

They pretend to be rich to impress their friends. These customers probably live in a nice neighborhood, and their friends and neighbors drive fancy cars, take expensive vacations, and renovate their homes. Therefore, these customers do the same to fit in.

They think their bonus will reset the counter. Maybe they get a salary plus an annual bonus, so they go into debt during the year and then pay it off when their bonus comes in January. It’s always worked before, so what could go wrong?

How can you help your client?

You can help your client by offering financial planning. The bottom line is that they need a budget. Unfortunately, budgets are like diets: everyone agrees it’s a good idea, but no one wants to have one. Here’s where to start:

Find out if your customer knows how much they are spending. The answer is probably no. If they use credit cards and direct debits and buy things online, then money has become abstract.

Action step: You need their checking account statements, credit card statements, and line of credit statements as well as their brokerage account statement if they can access it via debit card. You probably already have these documents from preparing your tax return.

Determine if they know where the money they spend is coming from. The next step is to match income against expenses, as there is likely a shortfall. Money is not saved because money is borrowed.

Action step: You need to make them aware of the problem. You have enough data to show that the shortfall is “covered” by taking on more debt. Ask them if they have a plan to pay off this debt.

Avoid contradictory roles. Being responsible can be difficult, and people are good at shifting blame. Your client may feign shock or blame their spouse, partner or children. They might want to shoot the messenger and blame you, but that doesn’t solve their problem.

Action step: When your doctor or dentist discovers a problem, they prescribe treatment. Faced with the prospect of the problem getting worse, the patient usually agrees. In the case of your client, if the problem was detected early enough, he will adhere to the objective of financial independence. Argue that the only thing better than keeping up with the neighbors is not having to work a day.

Help them set a budget. Your client has fixed expenses like their mortgage, car payments, utilities, and groceries. They also have discretionary spending like vacations and dining out.

Action step: Help them set a budget that’s not so restrictive that they’ll give up.

Give them good news. The budget will force them to spend less, but they can increase their spending if they find ways to reduce their spending. If they’re paying a high interest rate on their revolving credit card balances, it makes sense to find a card with an attractive introductory rate on balance transfers.

Action step: Motivate them to reduce their expenses by explaining the tangible rewards of their actions.

Reduce the number of credit cards they use. Your customer can probably survive on just two credit cards. The balance on a classic American Express card can be paid monthly, but it’s also important to have a Mastercard or Visa, as not all places accept AMEX. Your customer should also have a debit card.

Action step: Ask your customer to carry only two cards. Lock in others, paying balances over time.

Change the way they spend money. We forget about cash because we pay for everything with plastic. The interesting feature of cash is that you have to stop spending when you run out.

Action step: Encourage them to withdraw an agreed amount of money before each weekend as their ‘allowance’. They can spend it on necessities and anything they want, but once it runs out, it runs out. They need to stop spending.

Introduce responsibility. Money problems are one of the main causes of divorce. Try to get your married clients into the habit of writing down when they spend money and discussing it with each other every week. Here’s the rationale: When you’re dieting, you often keep a food diary, noting what you’ve eaten. It helps people eat things they wouldn’t want to admit later, and the same goes for spending.

Action step: Ask your customers to tell each other when and where they spent money, not to pass judgment, but to bring it to light.

Have a periodic check. A patient may agree with everything the doctor says during the appointment, then disregard the advice once they leave the office. However, the doctor will know when his advice is being ignored through regular blood tests and examinations.

Action step: Meet with them periodically and review client statements with them. Accountability should keep them on track. Be encouraging.

Take care of their savings. You’ll need to consider whether building a cash reserve or reducing high-interest debt is the best approach. If they have access to emergency cash by borrowing through their home line of credit or retirement plans, debt reduction may be the way to go.

Action step: Ask your client to commit to using their annual bonus or other windfall earnings to pay off their credit card and other debts. The savings from interest payments should give them more pocket money or, ideally, money they can save.

When it comes to debts, clients often get stuck in a hole. As the saying goes, “If you find yourself in a hole, the first thing to do is stop digging”. As an accountant, you can help your clients develop a plan to get by.

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