10 Money Mistakes Clients Make: Advisors' Advice

2. Leaving no cushion.

One challenge to a successful budget is to account for every penny, leaving the individual with no margin for error.

To recognize this issue, I encourage our clients to allocate 5% of their budget to an “other” category, in case they need to repair an appliance, fix a car or help a family member.

The “other” category gives them some margin in their budget.

— William Parrott, founder of Parrott Wealth Management

3. Not knowing how much they are (or aren't) saving.

Most clients way underestimate their budget. How I view a budget for planning purposes is this: Whatever isn’t being saved is being spent. Whether going to taxes, food or the cell phone bill, if the money isn't going to the 401(k), the IRA or a CD, it’s being spent somewhere.

That’s exactly how I point it out to clients.

As for crazy stories, I once had a client spending over $1,000 per month on takeout food alone, plus $600 on groceries. It was a younger couple, with no kids, and that was years before inflation hit.

— Nicholas Bunio, advisor with Retirement Wealth Advisors

4. Not seeing the big picture.

One of the biggest issues I see with incoming clients’ budgeting is that they aren’t zooming out. How negative or positive is their cash flow? How much do they spend each month? What balance do their accounts usually hover around?

Clients know what their rent is, and might feel guilty about ordering in, but they often don’t know if they spent more or less than they made last month. Using multiple bank accounts and several different credit cards for points creates a maze of financial transactions that obscures the bottom line.

The key is not necessarily getting more specific, but getting better clarity on the bird’s eye view, which does not have to involve categorizing every transaction. As financial advisors, we need to be looking at our client’s spending closely so that the projections built on top of spending needs don’t end up incorrect.

— Landon Tan, financial planner at Query Capital

5. Straying from their plan.

It seems like the biggest problem in budgeting is not a lack of planning, but a lack of willingness to be engaged with the plan. For example when my wife and I first started budgeting, we created a very detailed budget, then completely ignored how our spending was falling in line with the plan.

It can be as simple as a 30-minute meeting on a weekly basis or a 60- to 90-minute meeting on a monthly basis to check in. Taking time to ensure that you behaviors match your planned behavior ensures accountability.

There's no point in creating plans that result in no action.

— Joseph Trimble, financial advisor in Leesburg, Virginia

6. Not prioritizing savings.

The most common budgeting and spending mistake I see clients make is prioritizing their paycheck according to what they need or want to spend first, and then allocating dollars left over thereafter to be saved and invested. This mindset is part of what can lead to overspending.

While it can be difficult to do at first, I often recommend that clients allocate dollars for saving and investments first and only then look to spend what is left. If done with their broader financial goals in mind, they can even spend that remainder guilt-free.

Every client situation is different, but in terms of how much to save, a starting rule of thumb I will use is 20% of gross pay for younger clients, scaling up to 30% or more of gross income if the client wants more future flexibility or is starting to save later in life. A higher rate may also be necessary if the client is closer to retirement with a shortfall in what has been saved so far.

— Kevin J. Brady, wealth advisor at Wealthspire

7. Underestimating discretionary expenses.

There are two major mistakes I see made when it comes to budgeting and spending. The first mistake I see is that people underestimate their spending on the discretionary aspects of their budget, such as dining out, shopping and even alcohol consumption.

For example, clients may estimate that they can save 15% of their after-tax income per month, but in reality they are drastically underestimating the amount they spend in these areas. This spending bleeds into their ability to save and the 15% becomes 5% or even 0%.

The second mistake I see made is setting a budget, for example at $400 a month, for dining out.

The client is going to go over their budget for the month and they will tell themselves, “Since I am spending $600 this month, I will only spend $200 next month, so it evens out.” This rarely happens, so the budget needs to be reviewed with more discretionary spending going to dining out and being taken from somewhere else.

One simple solution to ensure savings isn’t being chipped away each month is the concept of “paying yourself first.” It is very simple now to have a percentage of each paycheck automatically sent to a savings account or a retirement account.

— Vaughn Kellerman, paraplanner at HCM Wealth Advisors

8. Forgetting about taxes.

I would say that clients underestimate the impact of taxes. This is true for individuals of more modest means and even wealthier clients, too.

For example, one client (she became a client after she did this) was so distraught with Q1 2020 that she took $200,000 out of qualified accounts to pay down their mortgage. They didn't even pay off their mortgage. They paid it down, and they ended up owing a lot in taxes. I worked with them to recast their mortgage to improve their cash flow.

Clients are also underestimating the risk of a long-term care event. This topic is so important to me personally because my parents were 14 years apart in age. My dad was diagnosed with Parkinson's disease, but fortunately, my parents were amenable to planning. Their long-term care coverage saved the day.

— Marguerita Cheng, CEO at Blue Ocean Global Wealth

9. Setting unrealistic expectations.

In my experience, the most important part of budgeting is being honest with yourself. It’s a garbage in, garbage out process.

If you love getting a special coffee on your way to work on Fridays and that is what gets you through the week, budget for it. Don’t create a budget that plans on cutting things that you know you will probably spend money on, especially if they are a reward that helps motivate you.

Another great (albeit unhealthy) example is when someone says that they will quit smoking to help their budget. In reality, if they don’t quit smoking, they’ll feel like a failure and then never look at their budget. Budget your expenses honestly and without shame.

Budgeting is a process and isn’t just about setting limitations. Budgeting is just as much about setting up positive reinforcement for good behaviors. Making more small, inexpensive purchases may drive happiness more than fewer large expenditures. Just make sure you are making room in your budget for your small rewards.

— Nicholas Gertsema, wealth advisor with Gertsema Wealth Advisors

10. “Buy now, pay later.”

Using “buy now, pay later” platforms without thought is a big mistake. That debt piles up quite quickly. Another mistake is taking on expensive debt for a car when the person has plenty of cash in the bank to pay with instead. Others include not tracking your spending to at least some general level of awareness.

And, while it absolutely does not have to be dollar-for-dollar budgeting, generating a fairly accurate sense of what your monthly spend number is gives you the power to control your money and make it work for you via automatic savings, investing and paying down debt. For example, just checking in via a service like Mint, once per month, can be sufficient, but you must do it.

Not tracking all your accounts or net worth in one place is an issue, too. That is one of the first things you should do upon college graduation, and you should open up more “adult” accounts, like a 401(k) or brokerage account.

— Sarah Gerber, financial planner at Momentum Financial Planning