Build a strong financial house from bottom up

By James Katzaman


Putting our financial house in order has never been more important than in today’s economic climate. I spoke with various experts and compiled these tips that apply not only now but also when times are good. I reiterate these points with clients as well as among my office because we can all stand a refresher on the fundamentals, even though most or all of these suggestions are obvious or common sense. Yet, seeing them spelled out can bring clarity and boost agent credibility with clients.

The cornerstone is to set financial goals. It’s important for your clients to know what they want for the future. Setting goals now and taking steps to achieve them will help them secure a stable financial foundation. As Kiplinger noted, “Choose goals you can get excited about because that will make you more determined to reach them. ‘Financial security’ sounds good, for instance, but we've already admitted that it's hard to quantify. It needs some skin and bones. Define what it means to you."

For example, your goals may be, "I want to have $250,000 in my retirement plan by age 50," or "We want to retire to Florida in 15 years with enough money to buy a house in Jacksonville and enough income to take a month-long, international vacation every year." Once clients have financial goals that you can put a future price on, the price of their goals can then be translated into a savings action plan that can start today.

That said, the next thing to ask is, "How often do you open your mail? While most people don’t like to open the mail because they know that bill statements are in the mail pile, it’s better that you do so sooner than later. Tell your clients not to put off opening their bills; instead, they should open their bills the day they arrive. Knowing what they owe will help you work with them to budget their money better as you both take steps to achieve their financial goals set at the start. When it’s time to pay a bill, they will be better prepared and feel good that they were able to pay it on time.

This brings us to paying bills on time. Doing so is a critical component of getting one's financial house in order. Every payment made is time-stamped and, in today’s digital world, it is also automatically reported. In the majority of cases, even if you pay your credit card bill just one day late, it will be reflected on your credit report as a late payment and will affect your credit score. Remind your clients that keeping their credit reports in good standing is important for building a solid financial future. If they have a busy schedule and lots of demands between work and family, they can set up automatic payments for their bills to ensure they are paid on time.

Of course, to be certain about bills, it’s essential to review monthly statements. This takes on added importance because in today’s technology-based world, identity theft is on the rise. Remind your clients to review all creditor statements for unauthorized charges and dispute them right away. Additionally, they should also inspect their bank account statements to make sure they don’t have unauthorized transactions or fees deducted from their accounts. They should be vigilant about managing their money and protecting their identity.

Cash-value life insurance and identity theft

An accurate record of upcoming expenses will also help avoid increasingly expensive overdraft fees. This is why all of us should record every transaction related to our bank accounts. You can do this via a paper journal in your checkbook or an online money management tool. There are very good tools available on the Internet that can synchronize with your bank account. In this way your clients can record all of their ATM withdrawals, checks and debited purchases (big and small) when managing their bank accounts. Remember, if you can incur an overdraft fee for a check written or a check made by phone electronic payment, you will actually get charged twice — once by your financial institution and once by the business you pay. Overdraft charges can have a snowball effect and can get out of control quickly, so clients should do all they can to avoid them.
Aside from the bank, we also have to manage our credit cards well. Misused plastic is the leading cause of debt today. Financial advisors should strongly recommend that clients not spend and use credit cards at a level where they are maxed out or over the credit limit. A good strategy to manage credit cards is to not charge more than half of one's credit line and to pay monthly charges on time. If clients spend more than half, they risk not being able to pay the balance. That could lead to financial ruin. While your clients may not be in a position to do so now, as they work to get their financial house in order, they should keep in mind that they will ultimately want to be able to pay more than the minimum monthly payment. Then they should get to the point where they can pay the entire balance due on the card each month.

See also: Getting to grips with your client's credit score

Throughout this process, we have to be realistic. Create a budget that works. While many people take the time to set financial goals, many don’t feel like they will ever reach them. Why? Because they have not established a budget that works for them and that they are committed to. In today’s busy world, it is very easy to overspend. When you break a $20 bill, do you actually remember what happened to the change? It's imperative to stress to clients the importance of keeping track of where they spend their money: Establish a budget, track your expenses, and do a comparison between the two (planned budget versus actual spending). When they see it on paper, they’ll realize how much they spend.

A plan is only good until the first shot is fired. So, expect the unexpected. Accidents and emergencies can happen in the blink of an eye. That’s why it’s critical to establish an emergency fund. Clients should put a small amount of money away each month to make their life easier should the unexpected happen. An emergency fund also keeps them from having to dip into the savings account. Remember, their savings account at the bank is tied to a short-term goal such as a vacation. Keep in mind, one's savings account and emergency fund are two separate things. Build up to 6 to 9 months of living expenses in the emergency fund. It might take some time to do so, but it’s better to start now to be prepared for when the hot water heater breaks and the car needs major repairs.

Lastly, we all need to be accountable to someone. Research has shown that people are more successful in achieving their financial goals if they are accountable to someone. Advisors can act as that accountability partner.

Because some new clients don't have the financial means to support ourselves and loved ones through dire times, we must remind them how important it is to protect their family and assets. Everyone needs life insurance, health insurance, homeowner or renter insurance, and car insurance if they drive a vehicle. The challenge is that millions of people are either uninsured or grossly underinsured. Insurance can be a complicated issue for a lot of people, but it doesn't have to be. We, as financial professionals, can explain financial matters in plain language and educate them.