Budgeting: Don’t Avoid it, Tailor it to Your Client


I’m going to go out on a limb here and say that most people hate budgeting. You don’t love being a parental figure to your clients, lecturing them about their finances – and your clients don’t love actually doing it, either. In fact, it can be a real point of contention in many married households with shared finances. But the reality is that budgeting is a crucial financial tool. Understanding that level of detail in your clients’ finances is truly one of the only ways to maximize their financial potential. The key is moving through what we deem as the four stages of budgeting to fit the current stage of your client’s life.

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The 4 stages of budgeting

1. Forced Budgeting

This is for the younger millennials, just out of school or maybe a few years into their job. They’re not yet in a high-paying job, mostly due to lack of experience. They likely don’t have much (if any) assets under management – even in their retirement savings. They’re forced to budget – not because they want to, but because they have to. Their focus is on paying the bills (especially student loans) and living within their means. Living with their parents for an extended period of time or eating PB&J for lunch every day is not out of the question. Those who diligently budget will graduate on to the other stages of budgeting. However, there will inevitably be a few who fall into credit card and other debt and stay in this stage.

This group is likely not the target demographic of many advisors. Even if you’re an altruistic planner who enjoys working with younger clients, in the end, you have to make money, too. This is a business you’re running, and if this group cannot afford to pay their bills, then why would we think they can afford financial planning fees. However, if you want to engage millennials earlier on, in the hopes that when they do develop wealth that they’ll turn to you, you can develop free resources for them. Don’t overthink it – making free budgeting spreadsheets or templates available on your website, or writing blog posts with tips and tricks specifically geared to this group could go a long way. You offer them some free support, provide value, develop trust, and then hopefully they’ll think of you in future years.

2. Awareness

This is likely for the mid-age millennial bracket (25-30 years old). This group still might not be considered highly paid, but they are working their way up the ladder and incrementally increasing their salary over time. They’re relieved to be out of the ongoing stress of the “Forced Budgeting” stage, and enjoying small financial triumphs…like having a comma in their checking account balance (which they now don’t have to check every time they withdraw cash).

Some still budget, but they now do it less frequently and use it more as an awareness tool. If they see they’re overspending in one category of expenses, they can still pay the bill that month (by borrowing from another category) and then make small adjustments to manage that expense better in the future. They dabble in “luxuries” from time-to-time, like expensive dinners or vacations. They’ve started taking strides to plan for their future, like developing an emergency fund, paying down their student debt, and contributing regularly to their retirement account (likely their only major financial asset). A few might have made some of their first big life purchases, such as a car or home. I might add that any millennial who comes from a wealthy family with financial support likely skips the “Forced Budgeting” stage and starts here.

For many advisors, this demographic still might not seem attractive, due to lack of assets. However, there are some advisors who are starting to experiment in this space, with some early signs of success, through unbundled planning services and retainer fee models. Budgeting still plays a role here, but this group no longer wants to focus on every penny in-and-out. The best way to serve this group is by reviewing their finances and ensuring they’re optimizing their budget. You can do so by asking questions like, “Is the deductible for your car insurance too low?” Perhaps they could afford to increase it, thus reducing their expenses to apply those funds elsewhere, such as their student loans or mortgage. The other key is helping them come to terms with the debt-versus-savings issue – many are so hyper-focused on putting all their funds toward paying off their student debt that they overlook the importance of contributing to their savings, like retirement. Helping them realize that they cannot borrow for their retirement is paramount.

3. Prioritization

This is where a good portion of older millennials and Gen X reside today. Many of them are considered to be in high-paying jobs at this point. They’re not “rolling in the dough” per se, but they do have some money to throw at luxuries they might value. They can afford a nice lifestyle and no longer have to focus on day-to-day spending as it pertains to their financial needs. However, they still have to prioritize their financial wants. They might pay a bit more to upgrade to a nicer house or luxury car. However, maybe that comes at the expense of dialing back their vacation budget for the year. Many have either completely or almost entirely paid off any lingering student debt. They’ve also likely started to develop more substantial financial assets outside of their retirement savings, meaning they either have some cash sitting around that they don’t know what to do with, or they’ve already started investing.

This group is becoming a more popular target market for advisors. In this scenario, you would help them budget by helping them work out their financial priorities. Many advisors working with this type of clientele preach this common saying: “You can have anything you want, but not everything you want.” Your job is to help them to understand the difference between their needs and wants, and then help them come to terms with what they truly value and what type of lifestyle they can afford given their current budget.

4. Goals-based Planning

Many advisors serve this demographic today. We’re talking about the older Gen X, baby boomers and beyond. Many have already hit or are close to hitting the peak of their earning potential. They have developed significant wealth, but also have a lot of added complexities surrounding their wealth, such as the need to plan around their taxes, business, debt, estate, etc. Their real concern is not “How am I going to manage my budget today?” but rather “How am I going to manage when I retire and have no new income stream?” Some may be more concerned about the financial impact on their family when they die.

To serve the needs of this group, you move away from the focus on funding their expenses to the furthest end of the budgeting spectrum and keep the focus on funding their goals. Since they have considerable assets, they no longer pay attention to everyday living expenses. And so, your key focus should be on optimizing the use of their funds to help them achieve specific long-term goals, such as retirement. Budgeting and categorizing expenses can also be utilized for planning ahead for retirement income needs to help alleviate concerns about drawing their assets down to $0 before they die.

Tailor your process

Remember the key point of budgeting is to help your clients make the best financial decisions possible, so you only want to leverage this tool with those clients who truly rely on you and take action based on your advice. To be effective though, you need to adjust the process to better fit the stage your clients are currently in today or use these 4 stages to tailor your process to meet the needs of the type of clients you want to serve in the future (like potentially the younger, millennial generation). Despite everyone’s apparent dislike for budgeting, these stages prove that there is a way that advisors can still incorporate budgeting into their financial planning without turning off clients (of any age).

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Missy Pohlig

Missy Pohlig

Missy Pohlig is the millennial contributor for Practically Speaking and also serves as Program Manager for the Solutions Team in the SEI Advisor Network.

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