Inflation has been a big headline lately, but not for the first time for clients and advisors who have been around for several decades. Those of us who lived through the 1970s remember high gas prices and double-digit mortgage interest rates. What I have found with my retired clients is that long before the Covid-era, they could adjust their spending as needed, usually in part to having to do without at some point in their lives.
I was working with a client couple over a decade ago whose spending was in line with normal living expenses but whose plan relied on successful market returns to make it work. When 2011 happened, we had to have a tough conversation about cutting back on spending and it was a conversation I was not looking forward to. Their response? “You tell us what to do and we’ll make it happen.” No negotiating, no excuses, just acceptance. I was blown away.
The clients went on to explain that they had both grown up poor and had experienced cutting back when needed. In their minds, the amount by which they had to reduce their spending was minimal.
I have seen resilience in other clients during duress as well. One client divorced later in life and that forced her to really cut back on her lifestyle. She got a roommate to help with expenses so she could keep her house, in which she’d raised her children, and she eventually ended up going back to work as a teacher to delay having to draw from her retirement accounts. She worked at a school where she was treasured and adored; this gave her such a boost at what would otherwise have been an incredibly low time in her life.
Ranking Expenses
Sometimes I need to review spending plans with clients to see which expenses can be reduced to get to the amount that works for their plan. I ask clients to examine their spending categories and number them by how much control they have over the expense. A “1” means they have no control over how much it costs, a “2” is some control and a “3” is total control.
Sometimes this makes me unpopular. For example, I remind clients that eating out and travel are a 3, because neither are usually things you MUST do. But this exercise helps show me what people value and can reveal differences in perceptions between family members. I also try to demonstrate that in some cases they may be able to reduce the cost more than they think. For example, changing a phone or cable plan, or shopping at less expensive stores, can result in sizeable savings.
Retaining Joy
However, it is also important to keep the joy in life so eliminating all controllable expenses is the surest way to sabotage a spending plan. I ask clients to consider what expenditures bring them the most happiness. Often is it coffee! They think about what matters to them and we set a number for them to stick to, but they get to decide how it is spent.
For example, if clients allocate $400 month to eating out, they can decide if they would prefer fewer more expensive meals or a greater number of less expensive meals.
Staycations have become more common and with people spending so much more time at home, any change of scenery can make a world of difference. You clients can consider driving instead of flying and visit somewhere close to home that have never been to before.
My family has always embraced road trips. When I was growing up, we would drive all over the country in our wood-paneled station wagon. During Covid, we’ve taken three major road trips from our home in Texas — to California, Massachusetts and South Dakota. It helps us all to remember that the journey is sometimes as enjoyable as the destination. And no lost luggage!
Finding Control
I ask clients to reduce their 2s and 3s by at least 10% and 15% respectively, as they are able to. This works not only for clients who must lower their living expenses but also for clients who need to save more to achieve their goals. By giving clients the power to make their decisions, it helps them realize they have more control over their money than they may have felt before. No one likes to feel powerless, so we review goals and values to remind them why we are making these choices. We choose the ones which get them closer to those goals and values.
Refinancing is another viable way to save some money. We believe interest rates will be raised this year, so this might be a suitable time for clients to refinance if they have not already done so. One of my clients had an extremely high interest rate on her mortgage; we were able reduce this rate and trim the loan duration 15 years without increasing her monthly payment. This means she will own her home free and clear when she retires; she will also save $36,000 in mortgage interest over the life of her loan.
Repairing vs. Replacing
The supply chain issues continue, which also impacts the prices of goods and services. We have had conversations about repairing cars rather than replacing with new ones and delaying larger purchases if possible.
One client had her heater go out in early November and the part needed to repair it was not immediately available. Fortunately, she lives in Louisiana so not subject to the frigid temperatures of the northern climes. But even so, the temperature dipped below freezing a few times while she waited for the part to come in.
She grew up in the Northeast so rather than consider moving out, she put on warmer clothes, got her camping sleeping bag out and stayed in her house for six weeks until the part came in — even though I reminded her she could afford to go to a hotel if she wished. Here in Texas, when we had our freeze last February, many people moved out for the four days of no power. But my client just put another sweater on — another reason she is one of my favorite clients.
Additional Reading: Reduce Anxiety for Clients and Their Heirs
What We Truly Need
While the pandemic and inflation have many downsides, I am hopeful one positive aspect is to help teach resilience. I see it in my daughter and her friends – a demographic used to instant gratification. For the generations who have not been impacted by war or other catastrophes requiring sacrifice, this is the most they have had to “do without.” I include my generation (Gen X) in that category as well.
We can all learn a lot from the generations who precede us about what really matters — and sometimes we also have to remind members of these generations. It’s important to try to focus on what we do have — and truly need — rather than what we have lost.
Lauren Gadkowski Lindsay, is a fee-only CFP licensee at Beacon Financial Planning in Houston, Texas. She can be reached a lauren@bfpcc.com.
