I find that so many of my clients, regardless of income, have no idea how much money they are saving. Early in my career, this created quite the challenge in developing a proper plan.

First, I would ask clients how much they were saving each year for retirement. They knew what they were putting directly into their retirement accounts, but I wanted to know how much of their income they were saving for the future. I would take those numbers and spend a lot of time carefully crafting a financial plan and creating proposals.

Then I would present the plan to the client. But time and again, clients would come back and say, “Well, maybe I’m not saving quite that much.” And “not quite that much” was usually a much lower number than they originally told me. Just like that, all the time spent on their financial plan was wasted because of bad data.

Most people have a checking account and a savings account, and often they have multiples of each type of account. They tend to add to the savings accounts when they get extra money or if they feel there is too much in their checking account. Then, when they have an unexpected expense or the holidays roll around or they want to go on vacation, they pull money out of savings. Money goes in, money comes out, and on and on, which is why they have no idea what they are actually saving.

It is critical to know what they are saving to ensure that any recommendations I make are realistic, viable and sustainable. I now teach my clients about different types of savings and how we can use them to figure out their savings number.

Short, medium and long term

Early in the planning process, I talk to my clients about the three types of savings: short, medium and long term. Ideally, short-, medium-, and long-term savings are three separate accounts. Clients can usually repurpose accounts that are already open.

Short-term savings is designated for regular expenses such as groceries, mortgage payments and cell phones. Typically, checking accounts are used for this. At the other extreme is long-term savings, which is for retirement. We designate a specific account to be the clearinghouse for this, usually a savings account. Money going into this account is only removed for investment in other vehicles for retirement. In the middle is medium-term savings, which is for everything that makes it hard for clients to see what they are saving. It is not for retirement and not a regular expense, and it might include a new car, college or a big trip.

The medium-term buffer account allows clients to clearly see if they are on track for retirement, because money going into long-term savings account is used only for that. It isn’t coming back out for one-time expenses. It also gives them real numbers to work with when creating a plan.

Change the client’s view

It is important 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 to cover them, and they don’t need to tap in to their long-term savings.

Obviously, both medium- and long-term savings need to be funded for this plan to work. I help clients specify the amounts that will regularly be deposited into each.

Even my highest-earning clients are excited to achieve clarity about their long-term savings amount. This shift in thinking about savings leads 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 clients are saving allows us to create a more automated plan, too. We can set up automatic deposits in investment accounts. We know how much they can afford for insurance premiums. When this activity is done automatically, plans are far more likely to succeed. 

Jennifer Mann is a 20-year MDRT member from Chicago, Illinois, USA. Contact her at jmann@lenoxadvisors.com.