Help clients get real about savings

I find that so many of my clients, regardless of income, have no idea how much money they are saving. Early in my career, this created quite the challenge in developing a proper plan.

First, I would ask clients how much they were saving each year for retirement. They knew what they were putting directly into their retirement accounts, but I wanted to know how much of their income they were saving for the future. I would take those numbers and spend a lot of time carefully crafting a financial plan and creating proposals.

Then I would present the plan to the client. But time and again, clients would come back and say, “Well, maybe I’m not saving quite that much.” And “not quite that much” was usually a much lower number than they originally told me. Just like that, all the time spent on their financial plan was wasted because of bad data.

It is critical to know what they are saving to ensure that any recommendations I make are realistic, viable and sustainable. I now teach my clients about different types of savings and how we can use them to figure out their savings number.

Short, medium and long term

Early in the planning process, I talk to my clients about the three types of savings: short, medium and long term. Ideally, short-, medium-, and long-term savings are three separate accounts. Clients can usually repurpose accounts that are already open.

Short-term savings is designated for regular expenses such as groceries, mortgage payments and cell phones. Typically, checking accounts are used for this. At the other extreme is long-term savings, which is for retirement. We designate a specific account to be the clearinghouse for this, usually a savings account. Money going into this account is only removed for investment in other vehicles for retirement. In the middle is medium-term savings, which is for everything that makes it hard for clients to see what they are saving. It is not for retirement and not a regular expense, and it might include a new car, college or a big trip.

The medium-term buffer account allows clients to clearly see if they are on track for retirement, because money going into long-term savings account is used only for that. It isn’t coming back out for one-time expenses. It also gives them real numbers to work with when creating a plan.

This was excerpted from the November/December 2024 Round the Table article, “Help clients get real about savings.”

Jennifer Mann is a 20-year MDRT member from Chicago, Illinois, USA.