Still thinking it’s not your job to provide clients with cash flow advice? Think again. All of the products the financial services industry builds and sells are connected to cash flow. For younger clients, for instance, life insurance is about taking today’s cash flow and creating a pool of future cash that will cover costs and replace income if the client passes away before they’ve created enough resources to support their loved ones for life. Meanwhile, older clients who purchase life insurance to cover estate taxes are making sure their heirs get to maximize cash flow from the full value of their assets. Then there are mutual funds, which multiply today’s cash flow to create future cash flow to support a client’s lifestyle, or allow them to take advantage of other opportunities.
Using a cash flow plan can make it easier for your clients to fund all of the things they need and want to protect and create in the future. Does every client do everything you recommend? Are all of your clients on track for a fully funded, debt-free retirement? Do all of your clients have the equivalent 4-6 months of expenses in a dedicated savings account? If the answer to any of these questions is no, even if only for some of your clients, you need to add cash flow planning to your process!
Learn more about behavioural cash flow planning by checking out our on-demand workshop.
Always be saving
Having access to a line of credit or other less costly forms of borrowing isn’t a good replacement for savings. You can argue that it’s better to borrow inexpensive money when your client really needs it, and keep more money going towards longer term investments that may be able to earn more than the debt costs over time. If clients were calculators, that might work. But your clients are human. Don’t forget that when your client pays interest, they are doing it with after-tax dollars. This means the true cost of servicing that debt is technically higher than it looks.
Beyond the logical and mathematically sound reasons for using debt vs. savings for emergencies, there are a lot of behavioural reasons your clients should have a dedicated emergency savings account instead.
First, the habit of savings builds a natural buffer into their month-to-month cash flow, and gives them wiggle room if they have to navigate a job loss or other sudden shifts in cash flow. Second, clients are likely to be more careful when they spend cash out of savings vs. using their credit card or line of credit to pay for an emergency. If the fridge breaks down, there is more pain of paying involved when using their savings to pay for it. And it could slow down their decision-making when searching for a lower cost replacement. Finally, having savings in a dedicated account creates a more visceral limit to how much is available to the client. A line of credit, on the other hand, could allow them to access far more money.
Don’t forget that your client’s credit availability is reduced when they use credit to cover emergencies, and this can negatively impact their credit score. Emergency savings should be in a dedicated high-interest savings account. Preferably, it should have a slight withdrawal delay, or the client should refrain from carrying the card to that account in their wallet so it doesn’t get used like a backup debit card. Encourage your clients to use a no-fee savings account, even if they have to go beyond their regular financial institution to find one. High-interest savings aren’t that high these days; there is no sense in the bank fees eating what little interest is earned.
Registered accounts aren’t ideal for short-term or emergency savings
Too often we see advice that a TFSA is a good use for emergency savings. Some even think that the cash amount tucked in their RRSP is a good storage spot for these types of savings. But your clients shouldn't waste their precious and limited tax-efficient investment options to house cash for short-term needs. Even if it's a so-called “high-interest” rate that’s earning cash, the tax savings on those earnings will be very low.
RRSPs are especially dangerous when used for savings. As you all know, even if an amount sitting in an RRSP hasn’t earned a penny, taking it out will come with a tax consequence because the withdrawal will be fully taxable as income. So it’s a good idea to check in with clients. Make sure they aren’t thinking of using their RRSP funds for emergency use.
The TFSA is a little more tricky. You can find countless articles written by financial professionals with varying degrees of expertise, suggesting that a TFSA is a great spot for emergency savings. But it’s not! Using a TFSA to house emergency savings squanders the tax-free powers of these accounts. While interest income is 100% taxable as new income, the amount of interest this cash will earn, even in high-interest savings, is miniscule compared to the amount other types of investments could earn over the long term. Instead, make the most of the tax-free function of your TFSA, and use it for longer-term investments that have the potential to make a much greater return over time.
The other issue with using TFSA accounts for short-term savings is that recontribution rules can be tricky. For clients with a lot of TFSA room, they may never run into this issue. But let’s say the client has maxed out their TFSA. They take out money to cover an emergency, but don’t need it all. So they decide to put some back into their TFSA, or top it back up with new monthly contributions. They’ll technically be over-contributing. They have to wait until the next fiscal year to put those funds back in. If your client has a maxed out TFSA and has an emergency once a year, or even every 18 months, this could get complicated.
So keep emergency savings simple. Encourage clients to keep these funds in accessible accounts that they can withdraw from relatively easily without creating any tax consequences, or risking penalties. Emergency savings need to be stored in a bank account, and a TFSA or RRSP should never be treated like bank accounts. Instead, they are most helpful for long-term, tax-efficient, investment accounts. One more silver lining for you is you’ll avoid the potentially extensive administrative burden to your business caused by clients using registered accounts for emergency use.
Help your clients know if they’ve put enough away
When your client has a cash flow plan, you’ll have two simple numbers to sum up what once was a complicated maze of expenses. You’ll know their committed and spendable numbers. With those two amounts, you can more easily calculate their emergency savings needs. And you can see how much money they can free up to fund both short- and long-term goals.
So don’t worry; saving for emergencies doesn’t have to jeopardize your client’s ability to fund their longer term goals, like retirement. With a cash flow plan, it’s far more likely your clients can do both. Each year when your client updates their financial profile, you can quickly and easily see how much they can continue to put towards the various strategies you recommend.
One more thing: a client with emergency savings is far less likely to stop or alter regular investment contributions, or make unplanned withdrawals that can take their plan off track. Saving real cash not only keeps your clients safe, but also protects your practice and the hard work you put into their plans too!
Don’t miss out on the opportunity to put cash flow planning to work for your clients. Offering cash flow plans isn’t only intriguing to your existing clients. Helping clients get more life from their money is sure to attract new clients as well. Learn about getting a Winton lead generation page to attract more high-quality prospects who you can pre-qualify in seconds. Check out our Winton lead generation page summer promotion.
Cash flow is at the core of all financial products and planning. Help your clients harness the power of a behavioural cash flow plan so they can reach their goals more easily now!
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.