I find so many of my clients, regardless of income, have no idea what they are saving. Does anyone else experience this?

Early in my career, this created quite the challenge in coming up with a proper plan. I would ask how much they are saving each year for retirement. They know what they are saving directly into their retirement accounts. But I wanted to know how much of their income they are saving for their future. I would take their numbers and I’d spend a lot of time carefully crafting a financial plan and creating proposals.

And then….I’d present the plan to the client. But time and again clients would come back and say, “welllll maybe I’m not saving quite that much.” And not quite that much was usually a much lower number than they told me. And just like that, all the time was wasted because of bad data. The truth is they had no idea what they were saving.

Most people have a checking account and they have a savings account. (slide 1) And often they have multiple of each type of account. For the savings accounts they add to it when they get extra money, or they feel their checking account is too high.

Then, when they have an unexpected expense, or the holidays roll around, or they want to go on vacation, they pull money out. Money goes in, money comes out. Money goes in, money comes out. And on and on which is why they have no idea what they’re actually saving.

It is critical to know what they are saving in order to know if any recommendations we make are realistic, viable and sustainable.

So, now I teach my clients about different types of savings and how we can use that to figure out their savings number.

Early in the planning process I talk to my clients about the three types of savings, short term, medium term, and long-term. (slide 2)

Short term savings is any expenses that are regular. It’s things like groceries, mortgage, cell phones. Typically, checking accounts are used for this.

On the other extreme is long term savings, which is for retirement. We designate a specific account to be the clearing house for this, usually a savings account. Money that comes into this account only comes out to go towards other investment vehicles for retirement.

In the middle is medium term savings. This is for all the things that make it hard to see what they are saving. It’s for things that are not for retirement and also not a regular expense. This could be things like a new car, college, or a big trip.

Ideally, short, medium, and long term savings are three separate accounts, and usually clients can repurpose accounts they already have open.

It’s critical to change the client’s view on the purpose of each account.

The real key is to get them to think about medium term savings. The idea is, when things pop up, and things ALWAYS pop up, they have money set aside in medium term savings to cover it and they don’t need to tap into their long term savings.

Both medium and long term savings need to be funded for this plan to work. With most clients we agree on the amount to regularly go into each.

By having this medium term buffer account, we gain clarity as to if they on track for retirement because the long term savings account is used only for that. It also gives real numbers to work with when creating a plan.

Even the highest earning clients get excited to have clarity about what their long term savings amount truly is. This shift in how to think about savings has led to a more successful planning process. The exercise allows everyone to feel confident with the numbers and the viability of the plan.

Knowing how much they are saving allows us to create a more automated plan too. We can set up auto deposits into investment accounts. We know how much they can afford for insurance premiums. When things are automatic plans are far more likely to succeed.

Hopefully, this simple idea of the three account system is one you can carry forward and share with your own clients.

Transcript

From chaos to control: Organizing savings for success

Author(s):

Jennifer P. Mann, MBA, CFP