Financial Unrest – Don’t Let Your Clients Throw Away Their Plan

By Michael Carlin

Like many of your clients, you may have experienced a realization that you suddenly have more money than you planned on. Perhaps you got a bonus, an inheritance, or you were so busy keeping your nose down that a sum of money seemed to spontaneously appear in your bank account. The point is, this sudden inflow of cash altered your sense of sensibilities. You’re swept up with dreams of spending uncharacteristically big as the urge to find a “cash equilibrium” supersedes reliable spending habits. Let’s talk about the most destructive financial force you have never even heard of – FINANCIAL UNREST!

Throwing Caution and Cash to The Wind

Say a client of yours earns a nice living, saves dutifully to her retirement accounts according to her plan and suddenly her company experiences a great year with record profitability. Your client is recognized for her contributions to the company’s success and receives unexpected bonus payments. She feels like she hit the lottery and buys a second home in a hot seller’s market. She’s thinking she’s investing her cash in real estate (even though she bought at an all-time high) and doesn’t rent out the property for income.

Another client of yours inherits money from a deceased family member and decides this is the perfect time to own a home on the beach. You only live once, so why not?

A third client owns a business that experiences a banner year in profits. Rather than reinvesting in the business, or building up a safety net and financial cushion, your client wants to spend his windfall. He finds himself looking at expensive trucks and home improvement plans.

Do you see why we should be discussing financial unrest with our clients?

Saving, spending + your long-term financial plan

According to tradingeconomics. com, nearly 70% of the U.S. economy is based on consumer spending. This spending largely dictates how much our economy grows domestically. So, we appreciate consumer confidence and the desire to spend. However, as professionals, we should advise our clients to live within their means and to plan for their future spending needs.

Let’s re-examine the above client cases (our financial version of the Ghosts of Christmas Past). How did these quick decisions affect their financial lives long-term?

Your first client bought a home in the Northwest for $700,000 and put down $250,000 while taking a mortgage out on the rest. The new mortgage put a financial burden on her that she didn’t have before. Let’s hope her income stays at this unusually high level because if her bonus goes down in the future, she won’t be able to cover the second mortgage on the house and she lost the growth on $250,000 for the future.

Yes, the house in the Northwest will likely grow in value, but by buying high it could take her a decade to break even. Plus, the cost of keeping the house up, real estate taxes and the pressure of a second home make this a challenging financial situation. In all, this purchase may add as much as seven years of additional work to her retirement age, which drastically changes her financial plan. Her plan was designed for retirement at 58. Now, she may have to work until she’s 65 to offset the cost of this purchase and increased risk/exposure.

Your second client bought a house on the beach for $2,000,000. It’s likely that additional money will be spent on future upgrades. People routinely forget real depreciation on beach houses is far greater than the norm because houses deteriorate more quickly in extreme weather conditions. With the inheritance gone, your client went from being able to retire in five years to 16 years. That additional eleven years of work will feel like an eternity. Like the Ghost of Christmas Past, this decision could come back to haunt the family, especially if the house was purchased at market highs with high upkeep costs.

Your third client spent $150,000 in home improvements. Those dollars may have increased the home’s value, but your client has no intention to sell. He loves his neighborhood and the school the children attend. Years from now, when he’s ready to sell, the updates will be outdated. If he invested the $150,000, earning 6% annually over the next 20 years, he might have accumulated an additional $481,000 in his investment accounts. Those extra funds would have dramatically improved his long-term plan.

Yes, there is value in getting out there to live your best life, but encourage your clients to be wary of financial unrest. It is real and pushes clients into making substantial investment decisions that might change their family’s financial life forever.

Michael Carlin, AIF® President Henry+Horne Wealth Management