Teaching your tax clients about financial fluency

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One of the best ways to add value and grow your advisory services is to teach your clients about financial literacy. According to a study done by Career Builder, almost four out of five workers live paycheck to paycheck to make ends meet, more than one in four don’t set aside any savings each month, and almost three out of four are in debt. This means a lot of Americans don’t have a safety net for emergencies, aren’t saving for a vacation or home improvement, and are not putting away money for retirement.

As your clients’ trusted advisor, you can teach them some skills about making good financial decisions in their personal lives by giving them some easy-to-digest tips:

Budgeting your money. By practicing better budgeting techniques, you’ll learn to free up money that should can be allocated toward savings and paying down debt. A lot of it boils down to a more systematic approach to handling your money. One key thing to do up front is to stay organized either on paper, in a spreadsheet or by using online banking tools to figure out where all your income is going.

You may also think about using multiple, separate checking accounts for fixed expenses such as rent and car payments. Online budgeting applications, such as Intuit® Mint®, can also help you keep track of where your money is being spent. These tools can give you a good visual illustration of where your income is going, and how you’re doing against your spending and savings’ goals.

Managing debt. You should consider paying off consumer loans or credit cards sooner than later for several reasons: Interest rates on personal loans tend to be high; you cannot deduct the interest; and the money could be directed, instead, toward a retirement plan. Also, carrying too much debt can be stressful and can damage your credit score.

Paying down a mortgage. You can also evaluate whether you should pay down your home mortgage. This may be a lower priority because the interest rate on a home loan tends to be lower, you may be able to deduct the interest (although the standard deduction has increased under tax reform) and you’re paying down the loan associated with an appreciating nest egg asset each month. Once your mortgage is paid off, think about what you plan to do with the extra money.

Saving money. A lot of people think about first spending their money, and then saving money for emergencies or a down payment on a house second. This can make saving money optional and doesn’t ensure you’ll meet your goals. If you directly deposit your paycheck into a checking account, consider adjusting it so that a certain amount or percentage goes into a savings account. You can also set aside some of your tax refund for savings. These adjustments are easy to apply and instill discipline.

Investing in a retirement plan. It’s always a good idea to start putting some money away early for retirement, especially with government incentives, possible employer matching and the power of return compounding. There are a variety of retirement plans available to individuals and the self-employed that allow a tax favored way to save for retirement, including IRAs, 401(k) plans and SEP plans. It’s smart to consult with a financial planner before deciding on a plan that best suits the individual. Lower income taxpayers may be eligible for the Retirement Savings Contribution Credit (saver’s credit).

Saving for college. We all know a college education is very expensive, and costs are continuing to escalate. Similar to planning for retirement, saving for a college education is very expensive, but you have many years to plan for it. The smart way to go about it is to start early, save a little money each year and let the money grow. The government also provides tax incentives to help with college savings, such as 529 Plans, Coverdell Education Savings Accounts and IRAs.

Sample Budgeting Plan

Creating a budget and sticking to it is very important. Here are four steps to better budgeting:

  1. Calculate your take-home income: This can be an extra challenge when you’re self-employed or have some non-wage income.
  2. Add up your expenses: Fixed expenses include rent, utilities and car payments, while variable expenses include groceries, clothing, gas and entertainment.
  3. Set your goals: Determine how much you want to save each month for big ticket items or paying down debt, and figure out if you need to cut back spending in certain areas.
  4. Assess your budget: Check your progress throughout the month. You may consider allocating your spending, for example, in the following categories: 50 percent on essentials (bills and groceries), 20 percent on savings, and 30% on personal expenses (clothing and gym).

Help Your Clients Succeed

We’ve discussed some key concepts around financial fluency, including budgeting, paying down debt, and saving money for emergencies and retirement. Consider sharing these tips with your clients and prospects in newsletters, social media and one-on-one conversations in an effort to broaden your consultation services and provide more value in your practice. This will allow them to be more fiscally responsible and financially secure.

Editor’s note: What more content on helping your clients with financial literacy? Check out our collection of articles on the Intuit ProConnect™ Tax Pro Center.

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