“When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little.”
Morgan Housel
“No matter how much money you have, the one luxury you cannot afford is arrogance.”
Lee Cooperman
Being a competent financial advisor obviously demands quantitative financial and investment tools and experience. However, what really separates an advisor is when he is able to balance those hard, left-brain skills with a broad set of right brain attributes. The ability to listen, to ask the right questions, to have an empathetic approach, and to have the ability to distill sometimes convoluted financial concepts in a relatable way, are critical. Working with clients to rationalize spending and increase savings is a topic that demands this double-barrelled approach.
At Dolan Partners our typical client is a business executive or business owner in his/her mid-30s to mid-50s. Our younger clients have invested in their careers in their 20s, and are now entering their 30s on a solid career progression, with increasing income. They are looking to establish a clear financial path and foundation to move confidently through the many big milestones and transitions they will face over the next decade and beyond (buying a house, paying down student debt, getting married, having kids, saving for college). The primary focus is to define 1, 5, and 10 year goals and funding needs, and to start managing monthly cash flow, set budgets, increase savings, and prioritize where that savings should go. The earlier clients engage in the process, the better.
For clients in their 40s and 50s, on the other hand, they’ve accumulated assets, have good income and are more established in their careers. However, they feel the weight of responsibility as their financial lives have grown more complicated, and are looking for assistance to competently steward their finances, to both protect what they’ve built and intelligently invest for the future. They are uncertain if they are in good shape for retirement, feel their finances and investments have been overlooked and their household financial behavior has grown unfocused.
A common theme for both is that while our new clients prioritized their careers and families, they’ve not given enough attention to their financial life, and are starting to feel the effects of that. What inhibits people from taking the first step toward addressing this can be simple inertia, or the feeling that they aren’t where they should be financially, have made mistakes, are uncomfortable talking about money, or feel intimidated. Dolan Partners understands all of these concerns, and is experienced in working with clients to gently overcome these inhibitions.
Regardless of age, cash flow management is central to our process. Rationalizing household spending and working to increase saving and investment is more controllable than most other factors influencing a client’s financial life. The central factors which drive stock market returns, interest rates and inflation, for example, are largely out of our control. We can competently prepare for a range of outcomes with regards to markets, but we cannot control or predict their course. We can exert meaningful control over cash flow and spending.
And yet most clients have an aversion to discussing spending. We have found that the issues clients want to talk about are the ones they are doing well in. It’s unearthing the topics clients resist or ignore that need the most focus. Household spending and saving is usually one of those topics. Often, there is a lack of communication and candor between spouses in this area. This is made worse by the fact that spending behaviors are enmeshed in our personal psychology, confidence, expectations and ego.
We work with both spouses to unpack their individual spending and saving values, history, expectations. We make sure each spouse feels heard in sharing their needs and wants. We focus on finding areas of agreement, and importantly, focus on areas of frustration, and work to build compromise. When these differences are material, and persist, the result is often frustration and building tension in the marriage. Many times one spouse largely defers to the other’s spending behaviors, which also creates resentment.
A core catalyst of overspending is ill-defined financial goals. We help clients identify and define these, and asses where they stand. This alone tends to immediately change behavior. We also highlight for clients how even modest spending cuts, and increased investment can result in large net worth gains over time. We then track monthly spending by aggregating all of a client’s spending accounts on our online portal, and construct an initial budget. We then inject accountability in the process to improve outcomes.
Our work in this area with clients is akin to the mentality and tactics used by private equity firm 3G in its acquisitions of large US consumer product companies like Anheuser Busch and Heinz. 3G’s believed these companies, with their in-demand, high margin, franchise products, had become far too complacent in managing costs. Too much success and stability had led to unfocused leadership, layers and layers of middle management, and not enough attention on profitability. With a relentless focus on cutting costs 3G was able, in most cases, to drastically improve operating margins. An article in Fortune described the 3G approach as “[producing] radical savings. It can eliminate entrenched methodologies that are there simply because they’ve always been there.”
In a way, many of our new clients have similar characteristics to these companies. They have robust and fairly stable income and have built up assets. Their saving. However, over time they have given most of their attention to income, and little on spending. To achieve optimal outcome, you need to focus on both sides. We help drive that. A good book with a bad title, “Double Your Profits in 6 Months or Less” is required reading for all new employees at 3G, and encapsulated many of their tactics. A few examples for you to consider:
-Define strategic and non-strategic spending: From a client’s perspective, strategic costs are those that are critical and align with their stated goals and objectives, or are discretionary but result in considerable enjoyment and fulfillment. Non-strategic costs are everything else and should be pared aggressively. All the unfocused, unproductive spending that doesn’t add value should be looked at very closely. In our view, monthly savings is one of the most important strategic “costs” and should be prioritized. Look at it as a non-negotiable line item, such as a mortgage payment, and make it every month.
-Look at every cost with suspicion: “Place the burden of proof on justifying costs, not on eliminating them.” For most, this is a mindset change. Ask the hard questions. Do I need that country club membership when I play golf 3 times a year? Do we need to spend $2,500 a month on restaurants? Do I need a new car every 3 years? Are we spending enough on kids’ tutoring?
-Have a sense of urgency/be impatient: Have a consistent and action-oriented focus on costs.
-Always keep resources very scarce: 3G layered massive debt on companies to starve it of liquidity and cash, and compel cost cuts. With our client’s we encourage them to keep their bank liquidity as low as possible. Too much cash in the bank inevitably leads to overspending.
-See every cost as up for grabs: This opens your mind to creative ways of reducing costs.
-Cut costs first, ask questions later: A common mistake is to be too cautious in cutting. If you do make a mistake and cut something you shouldn’t have, you can always reestablish it. You’ve also gained an important insight. Conversely, if you spend errantly, you can’t get that money back. “The spending tide is so great that only a very resolute and strong force in the opposite direction will successfully stop it.”
-Set arbitrary, non-negotiable budgets: Don’t spend too much time determining this; don’t overquantity. Determine what is aggressive but achievable, and set that number in stone.
-People are more adaptable than you think: Most clients find their families quickly adapt to a new level of behavior.
-Sign off on all the checks/bills: Client’s should turn off larger bill auto-pays, and scrutinize every bill, starting with the largest. Monthly savings, on the other hand, should be made automatic, deducted from bank accounts and moved to investment accounts. The opposite of what most people do.
Work with an advisor who goes beyond the superficial, and dives deep into all aspects of your financial life. If you’d like to learn more about our services, or set up an introductory call, go to www.dolanpartners.com.