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10 Reasons Why Clients Feel Poor

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Sep 14th 2017
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“The art is not in making money, but in keeping it.”  This popular quote sums up the dilemma when your clients, who are considered successful by many standards, constantly complain about being poor. Why do they feel that way?

10 Reasons They Complain

A major part of the accountant’s role is to look at the client’s budget and expenditures (not always the same thing!) with a fresh set of eyes. Here's why a client will likely complain to you about their finances being off:

  1. What’s Essential. What isn’t? – A New York accountant explained:  “People tend to get used to spending on non-essential items.  This is a good source of additional cash flow if they can differentiate the essential from the trivial and reduce their spending.”  Let’s assume they’ve done that and it’s provided some relief.  However, they are still overwhelmed. What other advice can you offer when you look at the big picture?
  2. Saving for Retirement – They’ve taken your advice.  They’ve enrolled in everything their company offers. They have 401(k)’s and IRAs. The problem is they look great on paper, yet have little in liquid cash. The Washington Post ran an article indicating 46% of Americans surveyed couldn’t cover a $400 emergency expense without going into debt.  Advice:  Remind your clients that are doing everything right.  They are sacrificing now to pay for the future.
  3. Income Taxes – They take an enormous bite out of your client’s salary check. According to the Tax Foundation , the average American pays 21% in combined Federal taxes. Add on state and local taxes and the rate climbs to about 29.8%. We haven’t added on health insurance and 401(k) contributions yet.  No wonder they feel poor. Advice: Suggest they review the Social Security projected payments mailings they periodically receive. Remind them Medicare kicks in at age 65.
  4. Pre-Existing Debits – It’s the homeowner’s version of payroll deductions. It’s logical their mortgage, property taxes, homeowners insurance and car lease payments are the big ones. There’s another old expression.  “Money talks, it says goodbye.”  It’s even made it into songs. Advice:  These payments level set their monthly payments allowing them to plan better.  Mortgage interest paid on your primary residence is generally tax deductible. However, real estate has generally been considered at appreciating asset. The S+P Average Annual Index for real estate over the past 20 years is about 8.6%. However, there’s something they can do. Comparison shop for homeowner’s insurance. It’s often a forgotten expensive that silently increases over time.
  5. Stagnant Wages – Inflation has been low but so have salary increases.  It’s been a slow, cautious recovery.  Prices go up, income doesn’t.  They are feeling squeezed. Advice: You can list the bills you pay regularly, including discretionary ones.  Shop around.  In industry you put out RFPs.  It wan work in your personal life on a more informal scale.
  6. Unpredictability of Bonuses - The economic recovery has been fragile over the past several years. Many executives got used to compensation based on salary, bonus (and stock options). The bonus would bail you out from near term overspending. That isn’t so certain today. Advice:  Companies love measuring stuff.  Remind them if the company is paying for performance, what are those metrics?  You should be in a better position at your annual review.
  7. School + Property Taxes – If you live in the suburbs, you pay school taxes. Although they don’t go up much, 2+% a year can add up. (Remember the Rule of 72).  There is usually a lobby of parents who want to best schools possible. Your client may be one of them. Advice: Top performing schools often translate into robust real estate prices. How has your client’s home been doing lately?
  8. Health Care Costs – It’s the equivalent of going past Boardwalk and Park Place when they have hotels in Monopoly. Every year you wonder what surprises they have in store. Like property taxes, it’s another area where they have little choice. Advice: An employer hopefully covers part of the bill. If not, you can shop around.
  9. College Education – The cost of college education exceeds the cost of inflation. Parents ask themselves if the cost of the education justified the type of job they will get. Attending an Ivy League school helps, but the expenses can be stratospheric. Advice: Colleges are facing competition of students. This requires justifying the education expense vs. the job to graduate will hopefully receive.  “STEM” curriculums are worthy of attention.
  10. Difficulty Saving After Taxes – Most people pay themselves last instead of first.  The easiest way to change the situation (and get on the direct debit train) is to do something involving payroll deduction.  Most companies have an attractive company stock purchase plan for employees. Advice: Check it out. It’s OK to start small.

Conclusion

Clients who are feeling poor are likely not seeing the big picture of their total net worth.  This should improve the situation. They also need some degree of budgeting to curtail the expenses that are silently creeping upwards.

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By sarajane
Nov 17th 2017 16:34 EST

Clients are never motivated to give up any of their money. We are all cheap because our survival mechanism is ruling our reptilian brain. However, the one thing that does inspire people to pay big money is pain. Hence why surgeons make so much money. The quote: "The art is not in making money, but in keeping it." is spot on!

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