Is budgeting a necessary part of financial planning?

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Sound familiar? You have a retired client. You have done an excellent job of financial planning over the years. They have an idea of ​​how long their money will last until retirement. Long enough ! A rising stock market acted like the wind at their backs. Unfortunately, this propelled them into higher expenses. When expenses exceeded available cash, they sold shares and paid their bills. Then 2022 arrived. Your customer needs help. What can you do?

Why does your customer need help? Inflation has pushed up their household expenses. The stock market did not cooperate, with the S&P500 down about 20% in the first half of 2022. They’re still overspending.

Everyone agrees that diets make sense, but no one wants to be subjected to the required discipline. Same with budgeting. What can you do to help your customer live within their means without coming across as the one taking the punch bowl, just when the party is starting?


1. The positive side of rising interest rates. If your client has a cash reserve (matured bonds, sold stocks), it makes sense to take advantage of rising interest rates. What can they get in safe fixed income instruments between six months and three years?

Strategy: Present the case for constructing a bond ladder. If rates rise, they fetch the highest yield when the shorter bond matures. If the rates don’t go up or down, they locked in higher rates for a few years while they were available.


2. Where does their money go? If their checking account is with your company, you should have a pretty good idea. Ideally, you also want to review payment card purchases. For the client, this may be similar to being told to write down everything they eat for a two-week period and then showing it to a dietitian.

Strategy: Your client probably worked in the industry. Comparing projected expenses to actual expenses is a standard strategy. You are not looking for blame, just identify areas of variation so they can be addressed.


3. Can the gap between income and expenditure be bridged? Your client may own a rental property, which helps their cash flow. The charges are increasing, but so are the rents. Rents increased nationwide by approximately 11.3% Last year. It has been estimated that Social Security payments could increase 10.3% in 2023.

Strategy: When leases need to be renewed, it makes sense for rents to increase. This should help your client’s cash flow.


4. Can longer-term expenses be reduced? Your client could face significant cash outflows in the near future. It could be a luxury vacation, replacing their car with the latest model, or adding an addition to their home. Can these expenses be deferred? Certain expenses such as the repair of the roof should not be postponed. Know the difference.

Strategy: Push large items where possible.


5. Can debt service be reduced? Your client has increased his credit card bills and home equity line of credit. Rising interest rates immediately translate into higher monthly expenses.

Strategy: Banks are competing to offer your customers new credit cards. The cards they have offer attractive balance transfer rates. Can they reorganize their credit card debt to reduce their interest charges?


6. Switch from variable rate debt to fixed rate debt. Let’s review your client’s home equity line of credit. They could owe tens of thousands! If interest rates go up, it makes sense to talk to their bank about converting to a fixed rate loan.

Strategy: Your client should talk to their bank, the one that issued the variable rate debt. They may have a process of transitioning from a variable rate loan to a fixed rate loan. The line of credit will probably no longer exist, but they will know their future monthly payments and will have a debt reduction plan in place to pay off that loan.


7. Reduce overhead. Your client has several bills that he pays every month, literally to keep the lights on. This includes their electric bill, wireless charges, cable bill, and household insurance bills. They may not have watched them in years, but they are quietly going up.

Strategy: Compare the prices. Can they get better rates from competitors? Once they have a better rate, calling your current provider and telling them might get you a match.

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