Podcast Episode #7: Spotlight on Estate Planning with Christina Lynn
Episode Summary Every good advisor wants to ensure a client’s legacy is protected, but many struggle with reviewing estate plans… Read More
Insights and best practices for successful financial planning engagement
• Emily Koochel • September 8, 2022
Understanding your clients’ wants and needs for their lifestyle is a critical part of delivering accurate financial guidance.
Clients generally think of their lifestyle as their chosen living conditions and typical habits. Lifestyle spending accounts for an individual’s needs, which are must-haves for a safe and healthy life, as well as their wants, which may make life easier or more enjoyable.
The “creep” in someone’s lifestyle occurs when their spending starts to persistently increase. Lifestyle creep can grow slowly over time, or it can grow rapidly when an increase in income leads to more spending.
By simply helping clients to identify when lifestyle creep is occurring, financial professionals can add significant value. If you can educate clients on how their spending behaviors may hold them back from the future they envision, you will create lasting impact on their financial lives.
How many of your clients would agree that at some point their spending creeped beyond what they thought?
There is no income range or household profile that falls prey to this—actually, consumers across the wealth spectrum battle lifestyle creep. This habit has even become coined in society with the term ‘keeping up with the Joneses.’ But not all lifestyle creep is about comparing ourselves to others.
It can start when one more small indulgence, like buying a daily coffee, becomes a need. These small habits compound and progressively take up more of the budget. It can happen as consumers get more comfortable with their financial situations and they exhibit less scrutiny towards their finances than they once did. Something once considered to be luxurious or aspirational becomes a necessity.
The sneaky part about lifestyle creep is that it can come on very unconsciously. People become pretty gracious to themselves when they stop being as diligent about where their money goes. When an individual gets to a more secure and stable point, whatever that means for them, they may relax a little bit. That relaxation can allow for spending increases or the larger adjustments to whatever that new luxury is that is no longer being accounted for.
In a market where inflation has reached its highest levels in over 40 years1, the cost of people’s wants and needs are rising, and suddenly spending has increased as well. According to our recent consumer survey2, advice-seekers want help on better understanding their spending and savings, to identify any discrepancies their current behaviors have on their future goals.
Each person has their own set of ideals and emotions about money—their money mentality. Shaped by someone’s personal history, their money mentality influences their thoughts, feelings, and actions with money.
For a client whose goals are a moving target or is outspending themselves and can no longer maintain the standard of their lifestyle, there is emotion attached to any reset or adjustment they may need to make. This can be quite difficult for people as they have gotten accustomed to a new “need.” They may be feeling shame, guilt, and stress about their situation.
To help, financial professionals must tap into their softer side. An empathetic approach is necessary to discuss lifestyle creep and guide clients on how to better align their goals and behaviors. In particular, financial professionals can assist clients with closer observation of their spending and further discovery into their money mentality.
To move forward, sometimes the best idea is to take a step back. Financial professionals can begin to help clients by challenging the basic truths in their money mentality alongside the reality of their spending. Ask clients to tell you what they think they are spending. And then together take a look at what they’re actually spending.
Because the creep in lifestyle spending can feel small when people don’t feel it rising, conducting a spending exercise like this will enlighten clients about the impact their transactions are having. Having up-to-date account records allows financial professionals to have a data-driven approach in the discovery. They can be specific with clients to uncover more of the why behind their spending behavior.
This spending exercise also creates a solid foundation for you to provide further support by:
We know that money is deeply personal and that clients’ attitudes towards money and their actions with money are constantly evolving. Understanding a client’s values is an essential step in building them a realistic financial plan that will help them achieve their most important goals.
Whether it’s helping them adjust from lifestyle creep or determining what their financial goals are, asking the right questions throughout the course of your relationship can help surface productive conversations that inevitably inform the ongoing process of planning. Here are 44 questions that can help start the right conversations.
To learn more about helping couples who have financial communication issues, watch the webinar embedded below. Experts Meghaan Lurtz, Ph.D., FBS™, and Megan McCoy, Ph.D., LMFT, AFC®, CFT-I™, join me to discuss financial management considerations for both partners.
Sources:
1 Ivanova, Irina, “Inflation Hit 9.1% in June, Highest Rate in More Than 40 Years,” CBS News, 13 July, 2022.
2 eMoney Consumer Pulse Survey, July 2022, n= 1,201
DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.
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