If you never examine how your clients spend their money, there’s really no need to make a financial plan. As people move through different phases in their careers, their attitudes towards spending evolve. But whether you’re a penny-pinching student or a top earner, every lifestyle step, every movement towards a more enjoyable life, demands a sense of balance and accountability. That’s why you need your clients to recognize the tie between spending, budgeting, and saving.
On this Elementality, Reese explains to the clients of his RIA why spending and saving are the yin and yang of good financial planning. If you want to build net worth, you can’t out earn bad spending habits. At some point you need the discipline a savings plan brings.
Podcast Transcript
Ryan Isaac:
I think it’s a myth in personal finance that getting the budget under control is like the main way to save your financial self. I think that’s the pressure we all feel. Like, oh, if I just get this budget in control, then everything will be okay, but the truth is the budget is like a crash diet a lot of times, you can tell yourself you’re never gonna eat sugar again for the rest of your life, and you might be able to swing it for a month.
Reese Harper:
And many do.
Ryan Isaac:
And many do, but you’re gonna eat sugar later in your life, okay, it’s just not like micromanaging your family’s budget to death is not a sustainable practice, it’s just not. You do need to track it, you do need to know what it is, and you do need to have some accountability and limits to it.
Jordan Haines:
Welcome to Elementality, each episode we will explore the challenges and the opportunities faced by financial advisors and how advisors can use Elements to grow their business and serve their clients better, we hope you enjoy this episode.
Ryan Isaac:
It’s like our annual check-in of one of the most important financial topics that is also one of the ones, no one really wants to deal with that often, which is spending, it’s the S word man, it’s the thing that like, it matters so much in personal finance and retirement planning and it’s so much bigger than just like trying to micromanage what your spouse is doing and fighting about the old budget but, it’s just the lamest thing ever to talk about and work on. But that’s what we’re gonna talk about today so, got a story though. I was talking to a client recently and if anybody can turn this into an actual country song we, there’s gonna be some kind of prize for this if you can do it, Reese, actually, if you had time to make it jingle. So I’m talking to a client and we’re going through a little bit of his like post COVID cash flow. We’re getting savings started back up. We’re gonna pay off some debts and one of the debts he wants to pay off is a credit card from a recent home purchase moved into the house and, when you move into a house, you gotta buy stuff. You gotta get stuff.
Reese Harper:
10 and four.
Ryan Isaac:
Yeah. You know the drill. So one of the things.
Reese Harper:
You got your furniture [laughter], you gotta fill that garage up, fill that storage up.
Ryan Isaac:
Yeah so one of the…
Reese Harper:
Hey, our storage is empty, we gotta put stuff in there.
Ryan Isaac:
Fill storage, Oh, we got four extra rooms now. We better fill them with furniture. No one ever will sit on. So one of the things on the credit card from the home purchase was cupboards. And there was this line he said, he’s like there’s just one thing that’s bothering me I want to pay off. I got cupboards on a credit card. And I thought that sounds like the best like financial country song that would ever be made as cupboards on a credit card. And I can just hear the chorus in my head, and if anyone can write a country song titled Cupboards on a credit card, you might be able too…
Reese Harper:
I like this.
Ryan Isaac:
I don’t know if you have any time.
Reese Harper:
Where… Country music is just really the heart of America, isn’t it? [laughter]
Ryan Isaac:
And there’s nothing more American than putting stuff on a credit card. Am I right?
Reese Harper:
Yeah, yeah. Totally.
Ryan Isaac:
So many people get the impression that maybe financial organization or financial discipline, the point of financial planning, the point of retirement planning is to like scrimp and save and be miserable until you’re 65 and then hopefully you still have a lot of health and time left to, and relationships left over…
Reese Harper:
Scrap it together real quick.
Ryan Isaac:
Yeah. And like, maybe still enjoy that future. And I think that’s just such a good point is we are very big advocates of making the now worthwhile and worth living and fun and happy and exciting and whatever that means for you. I’m a huge, that’s a huge driver for me for helping people. It’s not so that people can be rich in 30 years. It’s so they can be happy today and enjoy all the stuff along the way. So I think that’s a great first point to make about just the topic of spending and budgeting in general.
Reese Harper:
We acknowledge folks that it’s like and you should be able to enjoy it but it’s important to acknowledge that left to our own devices that you’ll never be able to make enough money. You’ll never be able to make enough, no matter how much you make.
Ryan Isaac:
Out earn your bad spending.
Reese Harper:
Yeah. And just like I always say, you can’t out-work out a bad diet.
Ryan Isaac:
Yeah. That… It’s the truth.
Reese Harper:
You can’t outwork out a bad diet.
Ryan Isaac:
You can’t.
Reese Harper:
I’ve tried.
Ryan Isaac:
I’ve seen people try.
Reese Harper:
Like I’ve really tried. [laughter]
Ryan Isaac:
I’ve got friends at the gym who try it. It’s like the fourth hour of the day. [laughter]
Reese Harper:
You cannot out earn your spending. It just doesn’t happen. At some point you have to have some discipline. People are gonna naturally push their spending to the max, in terms of like, they’re just gonna clear out their bank account. And so good financial planning kind of imposes just some soft kind of restrictions or some accountability. And it doesn’t have to be just on like your monthly budget. Sometimes it’s on the big stuff. Like you can’t afford to live in that house.
Reese Harper:
I’ve had many of people not hire me. Because that is the advice I gave them. They call, I probably had, I can think of like five pretty major conversations I’ve had with people that they were… The reason they reached out was because they were about to buy a new home. Make a big lifestyle adjustment. And they wanted to know if it was okay [laughter] right.
Ryan Isaac:
And you’re like no.
Reese Harper:
And, I’m like, I wouldn’t do that if I were you. That will really put a lot of pressure on your practice and your life.
Reese Harper:
Because it’s not just the new payment. They’re like, well, the payment’s only like…
Ryan Isaac:
A couple thousand more.
Reese Harper:
It’s only double, only double what it was. And I can totally afford that. I’m like, well, you’re just heading down. This is, it’s a lot bigger than that. Trust me like…
Ryan Isaac:
It’s more than payment.
Reese Harper:
This house needs to be filled up. This house will come with a new neighborhood, and new friends., a new lifestyle.
Ryan Isaac:
Yeah.
Reese Harper:
That like your income isn’t gonna support. And so don’t do it. And then they never hired me and they bought the house.
Ryan Isaac:
Yeah. Yeah.
Reese Harper:
And so, and I…
Ryan Isaac:
And hired you later?
Reese Harper:
Yeah.
Ryan Isaac:
That’s also happened like five years later.
Reese Harper:
Yeah. And then they come back and hire later to clean up the mess. Like, I know what you said. Like, I shouldn’t have done this.
Ryan Isaac:
It put us behind. I can think of the… Yeah. And shout out to the people who did that. I mean, they’re like, they’re fine.
Reese Harper:
And they rehired us. Good for them. Like coming back.
Ryan Isaac:
Let’s get back on track.
Reese Harper:
It’s time.
Ryan Isaac:
Funny you say that because I think someone listening might be like, well, there’s gotta be a certain income point. Like what if you made a million dollars a year, like personal income, a million bucks. You can’t outspend a million bucks. Have you seen clients who make seven figures spend seven figures?
Reese Harper:
I have.
Ryan Isaac:
And it’s…
Reese Harper:
COVID was a nasty time for a lot of seven figure earners. I can tell you that.
Ryan Isaac:
Yeah.
Reese Harper:
‘Cause with seven figures income, comes a significant six figure tax bill. And it’s always a surprise.
Ryan Isaac:
Yeah. It’s a lot.
Reese Harper:
And no one ever wants that surprise. And it’s just, it’s a one year income starts to get higher, it just, certain things kind of feel like entitlements to some people that just don’t to others. As your income rises, things that used to not be a big deal, or things that used to be a huge deal, like it used to stress out about. Like I remember, I went out to, like I was telling you, Drop on Saturday with my wife, right? Great dinner. I mean, I didn’t think about it. I still don’t know what that meal cost.
Ryan Isaac:
And that would’ve been like a once in a, like an annual anniversary date?
Reese Harper:
That was an anniversary date thing. It was an anniversary…
Ryan Isaac:
Yeah. And you knew, and you knew what you spent after that anniversary date.
Reese Harper:
And I stressed, and it stressed me out. And I was like, oh man, we probably shouldn’t done that, huh?
Ryan Isaac:
Now you’re just signing the bill and like dessert…
Reese Harper:
And Barbie’s like, “Yeah. We won’t do that again.”
Ryan Isaac:
Yeah.
Reese Harper:
Let’s skip next year.
Ryan Isaac:
Yeah.
Reese Harper:
We don’t need to…
Ryan Isaac:
Yeah. That wasn’t… We didn’t need to.
Reese Harper:
Like anytime a ticket was over a hundred dollars.
Ryan Isaac:
Yeah.
Reese Harper:
It was nuts. And…
Ryan Isaac:
But everyone goes through that, don’t you? I mean, everyone goes through that. When you’re in college, to residency, in your first job, in your new ownership, you always get through those thresholds. I mean, it’s a second car in the family. It’s a house that fits everyone finally. It’s a vacation where you don’t have to share three people to a bed finally.
Reese Harper:
Yeah.
Ryan Isaac:
Like you, everyone blows through those thresholds where you’re now spending what you once thought was like insane to spend. And it, that’s the point, is the income is not, there isn’t like a point of income where that no longer happens. Like you just, you just keep doing it. Let’s talk first about one of the things I don’t think people realize about spending, I think when people talk about their spending, their monthly budget, it feels like this short term thing…
Ryan Isaac:
We just gotta, we gotta get the budget. We spent too much on groceries last week or went out to dinner too much or went shopping too much. But I don’t think there’s this relation to net worth and what like higher spending means on the strain it puts on your net worth. Like how much bigger it needs to be in the future for you to be financially secure. So let’s talk a bit, and this will kind of relate to one thing that we measure for clients in our elements planning system called total term, which is just a measure, it’s a formula that tells us at what point your net worth is big enough to sustain the spending you’re used to living on. So let’s just start there. Like any thoughts on in that formula, the net worth, it’s just basically net worth divided by spending, right? Spending is the denominator. So the bigger that number gets the bigger, like the bigger the net worth you need to like maintain your spending one day. So let’s just start there. Like, I don’t think people realize how much spending plays into net worth and retirement calculations. What do you think?
Reese Harper:
Well, let’s just take, let’s take a, let’s take an example. Let’s say someone has a net worth of $2 million. Let’s say someone has a net worth of a million dollars and they spend a hundred thousand a year. That’d be a total term score of a 10, right? But that same, another person in that same situation who spends instead of spending a $100,000 spends $200,000 only has a net worth or a total term score…
Ryan Isaac:
Of a five.
Reese Harper:
Of a five. Meaning one person can last for about five years and the other person could last for about 10 years. If you’re some kind of a Russian billionaire that has a $400 million yacht that you like to like sail around to film festivals around the world, which is a thing. I was just looking at really expensive yachts the other day, trying to like, feel like I was trying to figure out how illiquid this billionaire was when I was trying to calculate things.
Ryan Isaac:
Okay.
Reese Harper:
And I saw the yacht, that the yacht the yachts kind of good, like expensive yachts can range anywhere from like 150 to like $550 million, depending on like where you buy. Yeah. They’re like small cities, but I mean, they’re, it’s crazy. But they’re purchased quite a bit. I mean, I don’t, like Jeff Bezos has a really nice one. I think it’s called like the Flying Fox or something like that. And it’s…
Ryan Isaac:
Well, you got it…
Reese Harper:
Very expensive.
Ryan Isaac:
I think more stressful might be naming it. It’s a lot of pressure to name. What do you name it?
Reese Harper:
I mean, like Octopus. I saw one called Octopus and I was like, dude, a $400 million yacht named Octopus. You gotta come with something better than that. It should be like, anyway, so you can take the math of this stuff. You can say look like if, and in my own case, like I’ve told people before, it’d be nice to have a swimming pool one day. I would love to have that, but my utility bill’s probably five or $600 less a month because I don’t have a pool. And so over a calendar year my total term score or the amount of money, the wealth I have to have to support my preferences would be a much higher number. So your spending is everything. Got off the phone this morning with a young dentist. He just told me he… Not young. He’s probably in his 40s, but.
Ryan Isaac:
Hey, that’s young for me now.
Reese Harper:
Yeah.
Ryan Isaac:
That’s young these days.
Reese Harper:
I’m saying that is Ryan and I’s ages.
Ryan Isaac:
Yeah.
Reese Harper:
We’re…
Ryan Isaac:
We’re gonna call that young.
Reese Harper:
Obviously, we wanna believe we’re really young.
Ryan Isaac:
Yeah. We’re calling that young just for everyone listening.
Ryan Isaac:
Yeah.
Reese Harper:
Yeah.
Reese Harper:
He had gotten to a point where work was starting to become optional. But after talking about his financial statement, I was like, “Well, how is that possible? Don’t you need to work a little bit longer?” He’s like, “No. We only spend like 3800 a month.” I was like, “Oh, man.” Okay. [chuckle] Yeah. You have two kids, and you’re really conservative, and you’re literally living on $3800 a month, and you have a paid-off house that’s a $200,000 house. And, yeah, you are. You’re done. And he was like… That’s his choice. That’s Ryan’s general nutrition bill [chuckle] for his workout routine.
Ryan Isaac:
Yes. Yes. Feel those squats.
Reese Harper:
It’s not even quite that high.
Ryan Isaac:
Yeah.
Reese Harper:
But it’s like everyone’s got their preferences. The more your spending is, the more your net worth has to be to support that. And it’s a habit that you don’t really change. Once you are the… I just don’t have… Do you have a lot of clients that are getting rid of their second home, their vacation property, where they go… I would say 10% of people have to.
Ryan Isaac:
Yeah.
Reese Harper:
But if people had their druthers, no one would.
Ryan Isaac:
No one would. Most of my clients are still in the young age. I’m gonna call it young now 40s and 50s.
Reese Harper:
Yeah. Yeah.
Ryan Isaac:
But there are quite a few people who have delayed the big plans that they once had in their 30s for the huge renovation. They’ve got the beach house, and they were gonna just deck it out, like a million-dollar renovation project. And now like 50 grand went into it, and they’re like, “It’s good enough.” [chuckle]
Reese Harper:
“We’re good to go.” Yeah.
Ryan Isaac:
“But we’re just gonna… We’re just… It’s okay.” [chuckle] “We’re gonna deal with it.” So yeah, I mean…
Reese Harper:
Yeah, I think that’s a… I’d say, it’s just important to remember, every lifestyle step that you take, every little movement in towards a little bit more comfortable life, little bit more enjoyable life, there is a price to pay. And you cannot out-earn it if you’re… At some point, you have to determine where your limits are.
Ryan Isaac:
Yeah. And…
Reese Harper:
And I would say that has to be a more frequent discussion than once every few years. It’s something that you have to kind of check yourself on more frequently than that.
Ryan Isaac:
Maybe the ugliest word in personal finance that no one really wants to talk about is the B-word, which is the old budget. Having been a former Dave Ramsey disciple myself early in the days, the budget, I just hear that word and a lot of emotion attached to that. So…
Reese Harper:
Okay.
Ryan Isaac:
There’s a… I think it’s a myth in personal finance that getting the budget under control is the main way to save your financial self. That’s the pressure we all feel. Like, “Oh, if I just get this budget in control, then everything will be okay.” But the truth is the budget is like a crash diet a lot of times. You can tell yourself you’re never gonna eat sugar again for the rest of your life, [chuckle] and you might be able to swing it for a month. [chuckle]
Reese Harper:
And many do.
Ryan Isaac:
And many do, but you’re gonna eat sugar later in your life, okay? It’s just not… Micromanaging your family’s budget to death is not a sustainable practice. It’s just not. You do need to track it, you do need to know what it is, and you do need to have some accountability and limits to it. But in my opinion…
Reese Harper:
Okay, let’s define that just a little more.
Ryan Isaac:
Okay. Yeah, do it.
Reese Harper:
‘Cause what Ryan is saying… ‘Cause he’s talked about this a lot, and probably he’s skipping over a couple of details…
Ryan Isaac:
Skippity-skip.
Reese Harper:
Is that…
Ryan Isaac:
Gallivanting over details.
Reese Harper:
There’s people… What we’re saying is sitting down and keeping track of everything to the penny and setting specific budgets for each category of personal spending, I.e. There’s a restaurant and dining-out budget that’s different from groceries that’s maybe different from fast food. We have our fast-food-quick-drive-through budget, and then we have our groceries or our dining out. And we’re gonna track all of that, and we’re gonna hold ourselves to a budget. It’s a lot of time invested, is what we’re saying. It requires hours and hours. What we typically see is that early in people’s lives, when money is really tight, that is when they generally go that direction. ‘Cause you’re forced to do that. Why? Because you are gonna lose your home and they’re gonna take away your car. And you get scared, and you budget like that. And that Dave Ramsey’s audience, generally, tends to be people that are a little bit more worried about their next paycheck kinda thing. And that’s a great audience that he serves, and I’m grateful that’s happening.
Reese Harper:
Our audience tends to be people that were starving, eating ramen noodles for their entire time during dental school and residency. Maybe they lightened up during residency. [laughter] But like…
Ryan Isaac:
Just took more loans and ate better.
Reese Harper:
Then they just go and kinda get step right into money that’s more than they’ve ever had. And it’s more like a professional athlete than not. In those cases, we think it’s good to budget in the early years. But what Ryan’s saying, I’m just trying to… I’m trying to just highlight the difference here between being really granular, like you’re saying, and obsessed about budgeting… That won’t last forever, and it’s not a sustainable practice, and… But we think you should do it early in your career a little bit to get a sense for what it’s like and how it feels.
Ryan Isaac:
You should experience it a few times.
Reese Harper:
Yeah.
Ryan Isaac:
Like a couple times a year or once a year.
Reese Harper:
But at some point, there’s a better way. And what were you gonna say the better way is?
Ryan Isaac:
My suggestion is to do the reverse of the budget, which is to force automated savings with a good degree of accountability, preferably to another human.
Ryan Isaac:
Before you even think about the budget what I’m saying is consult with somebody, ideally financial advisor that knows your whole comprehensive overall situation about what an ideal savings rate would be even a challenging one for your current income and that’s going to change. An ideal savings rate on 150 is different than 450 and that’s different than a million but find a challenging savings rate that it’s going to make sense for your situation and push that automated first before anything else.
Ryan Isaac:
And what, what I’ve found to be true is that even… And everyone’s personality is different with a budget, but like there’s some personalities that are really… They’re just really anxious about the monthly budget and the monthly spending. Like they can’t stop thinking about their bank accounts and what got spent yesterday. Some people just obsessively check that stuff. And even for those people, I found that once they’ve established an automated, healthy savings rate, it really chills them out a lot. Like they just kind of get this freedom to go. I mean, it takes a little bit, but they’re just like, “Oh, I really don’t have to micromanage this. It doesn’t matter what we spend on vacation, right?”
Ryan Isaac:
I’m like, “No, you have a 30% savings rate, which is killer for your income.” Well, I went to the golf shop [chuckle], I bought some new stuff. And my wife went shopping and she bought some stuff and we got stuff for the kids, you’re saying it doesn’t matter? I’m like, “It doesn’t matter because you’re saving enough money. Your savings rate is healthy and it’s putting you on track to build a big enough net worth. But that is, that is also not… That might seem simple, but it’s also not an easy job to pull off long term. Maintaining a savings rate, it’s a very big job, it’s very behavior driven and accountability is like the main ingredient to making it happen over a long period of time.
Reese Harper:
Yeah, great insight. I think that’s great insight.
Ryan Isaac:
So the invitation to be like, if this is something which is everybody, like you’re thinking about a lot, you have a lot of anxiety around struggling with the budget, the savings like how to make one work. I mean that’s what we specialize in, that’s our expertise, that’s the whole element system that we build is to build enough organization and accountability to making sure a healthy savings rate happens for a long period of time. And that’s like the key ingredient to future financial success in my opinion.
Abby Morton:
Next time on Elementality.
Billy Zerillo:
You know as well as I do, right? Being in this industry there’s a lot of jargon.
Abby Morton:
Yeah, yeah.
Billy Zerillo:
And there’s a lot of information that can be housed inside a financial plan. And a lot of that information from what… When I was talking to clients, A, they really probably didn’t really care [chuckle] about the information I was going over.
Abby Morton:
Totally.
Billy Zerillo:
Like, in detail, right?
Billy Zerillo:
Like they’re like, oh, am I… It was really came down to the question, like, am I okay, right? And that’s one of the questions that Elements helps us answer, but getting back to it, being able to like sit down with a client and articulate like where they’re at and what we need to do to correct those numbers, right? They instantly get it. They’re like… I’m like, “Hey, your savings rate is at 10%. I’d really like to see by the end of the year to get us to get to 15%,” right? Because healthy is probably 20, but I don’t expect you to jump all the way to 20% tomorrow, but like 5% we can definitely do. And so being able to articulate that to a client, they instantly understand, “Hey, I need to get to 5% by the end of the year.”
Abby Morton:
To find out more about Elements, go to getelements.com/demo. Elementality’s executive producers are Reese Harper and Carl Richards. Elementality is produced by Tad Henderson and directed by Abby Morton. Have a good one!