Tipped over jar of change.

Field Work

5 Tools to Control Spending

Financial planners say poor spending habits are their biggest obstacle to helping clients.
So I asked a dozen financial planners around the country – all members of the National Association of Personal Financial Advisors (NAPFA) – to share their best tools and tips.  This week I’ll provide the five “best” tools and the reason planners like them.  Next, I’ll post planners’ top five motivational tips.

Set Goals

Spending is emotional, so encouraging clients to focus on goals balances the emotional scale by giving them an incentive to save. Grandchildren, family vacations, a comfortable retirement are powerful incentives.

Reason: “If they have no goals and nothing that they want their life to be, they’re going to spend their money on stuff to fill this empty hole,” said Dan Weeks, a planner in Overland Park, Kansas.

Track Spending

Every planner agreed that budget tracking is critical to spending control.  Quicken, or websites such as  Mint.com or  Pearbudget.com, allow individuals to track and categorize monthly spending, whether groceries or a gym membership, and tell clients when they have exceeded a pre-determined budget in each category.

Reason: Knowledge is power. Clients cannot control what they do not understand, said Rick Kahler, a planner in Rapid City, South Dakota.

Try the Envelope Method

Mvelopes.com, the online version of the old-fashioned envelope method, is an interactive tool to help control spending. Individuals put money aside from their paycheck into labeled envelopes to meet known – and unanticipated – future expenses: housing, groceries, medical costs, car repairs.  Jack D. White in St. Charles, Missouri, suggests using jumbo spending categories to give clients more freedom – and wiggle room – to transfer money around to where it’s needed.  For example, instead of separate accounts for heat, utilities, maintenance, and mortgage, create one housing account.

Reason: People have difficulty conceptualizing money.  They also forget their payment commitments.  Envelopes are a concrete way to look at the demands on a client’s paycheck.

Use Debit Cards

Compulsive spending is like alcoholism.  Consumers can’t resist temptations that are all around them.  The credit card is the Great Enabler.  Financial planners said the debit card, which immediately draws down a client’s checking account, is best for keeping tabs on how much money is left for the rest of the month.  Credit cards paid off every month can serve the same purpose, but are not as effective.  Debit cards are better than cash, too, because clients who pull money out of an ATM machine lose track of how they spend it.

Reason: Academic research shows that compulsive purchases are more likely when buying an item is removed in time from paying for it.  According to “Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior,” by Priya Raghubir at New York University and Joydeep Srivastava at the University of Maryland, “the pain of paying is somewhat dulled” by using gift certificates or credit cards.

Create a Mad Money Account

This allows people with spending problems a little freedom to go crazy and just buy something.  But limit these purchases.  If clients have 15 bad spending habits, make them choose two options for their Mad Money account.  For example, they might choose between a latte every morning or one new outfit once a month.

Reason: Mad money is a privilege and forces clients to distinguish wants from needs.


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