The benefits of using cashflow planning with clients is not just financial, says Louis Williams, head of Psychology & Behavioural Insights, Dynamic Planner.
Helping your clients to manage their finances and reach their ultimate goals should involve active planning around their cash flow. Holding engaging discussions on what your clients must spend their money on, would like to spend their money on and how they dream of spending their money, can reduce their negative associations with “budgeting”, and therefore increase their motivation to manage their finances. Once cash flow planning becomes a part of the process, clients can begin to gain greater confidence in their abilities needed to achieve their goals.
Motivation to start planning
It can often be difficult to feel motivated to engage in cash flow planning- working out a budget and a strategy can seem daunting for many. However, your client’s motivation to do this is very important for them to be driven to remain goal-oriented during their life journey. Working with your client using interactive and intuitive tools is therefore necessary to encourage them to plan. A tool that allows your client to feel competent with managing their finances, helps them take the required steps to meet their ultimate goals.
When we work with or alongside someone on a complex task, such as cash flow planning, our interest in the activity increases and we are more motivated to complete similar tasks in the future. In fact, the mere sense of working collaboratively with another can increase our intrinsic motivation – where we are motivated to complete tasks without the need for an obvious reward, it becomes an activity we enjoy. Academic research shows that by having a sense of working with others on a common goal, individuals are more persistent to complete a challenging task, find them more interesting and enjoyable, are more engrossed, and perform better.
When you plan with your clients using a cash flow tool, you can provide your clients with autonomy as they engage in an important activity, not due to doing what they are told, but because they are aware of its usefulness, and the essence of this is aligned with their doubts and questions, i.e. “how long will my portfolio last?”.
Increase in financial self-efficacy
Your client will be aware that they must manage their finances in order to achieve their goals, however this hugely differs to having the confidence to do so. Having high financial-self efficacy – belief in one’s ability to manage their finances in order to achieve their ultimate financial goals – positively influences financial decisions and feelings of financial satisfaction, and allows individuals to be resilient when faced with a period of adversity, where they are better able to handle stress and regulate their emotions.
Results from research conducted at Dynamic Planner show that those who were experiencing the market crash in early 2020 had lower levels of financial self-efficacy and higher levels of negative emotions and feelings than those surveyed prior to this period, illustrating the potential impact of adversity and uncertainty on clients confidence and emotions.
One major way to resolve this and to develop your client’s level of financial self-efficacy, is to engage in cash flow planning. Cash flow planning helps clients learn the discipline and skills it takes to manage their finances. By understanding their cash flow, they can be better prepared for periods of adversity, and as they make progress towards their goals, they can obtain a sense of achievement. This has a positive effect on their financial self-efficacy as their confidence in their abilities to face future financial tasks and difficulties increase.
When goals are broken down into smaller achievable targets, clients are provided with realistic goals that they can work to. As clients meet their goals, whether these are what they must do, would like to do and/or dream of doing, they build their beliefs in their abilities. It is then important at this stage that as an advisor you celebrate your client’s achievements, further encouraging their progress towards their remaining goals.
By engaging in cash flow planning, a client not only develops stronger beliefs in their abilities and has greater insight into their future, but they also gain confidence and trust in their adviser who is providing detailed support answering the questions of many anxious clients, showing the value of their assistance.
Academics have been using several key statements to further understand client’s levels of financial self-efficacy, i.e. “I worry about running out of money in retirement; It is hard to stick to my spending plan when unexpected expenses arise”, and these reflect the concerns of many clients. It is here where we can clearly see the potential positive impact of cash flow planning on financial self-efficacy, and it is therefore essential to use an interactive cash flow planning tool to settle clients’ doubts.