Are Your Clients Unconscious About Money? A Four-Question Test

In “What Clients Want, and What Clients Need,” I discussed how advisers can use a simple plan sketched on the back of a napkin to communicate the value of financial planning to people who don’t think they need it. Of course, this isn’t a real financial plan—more the doorway into a proper financial planning discussion. It’s designed to ensure the audience experiences the “a-ha” moment of revelation about the value of financial planning, so that they will then take some positive action.

Alongside providing an understanding of the mechanism by which financial planning works, communicating the value of planning is critical for a second reason: the vast majority of people who think they have enough money are woefully unconscious about it.  

This seems so counterintuitive, doesn’t it? You would think that people would know where their money goes. They earn it. They spend it. They owe it. Some even save or invest a bit of it. But time and again, when I ask four simple questions to test my theory that people are “cash clueless,” I get the same result: almost everyone fails. Over the past 25 years I have asked these questions of thousands of people, in venues ranging from small seminars to large conferences.  And yes, in case you were wondering, the financial planning community fares no better than the general population.

The four-question test evolved out of many conversations I had with clients back in my advising days, when I was trying to shift their attention from the minutiae of investment selection or fund performance to focusing on the basics: their spending patterns or whether they were even saving enough. If they didn’t have a grasp of that in the present moment, I thought, what were the implications for their spending needs in retirement some 10, 20 or even 30 years down the road? Not good! And asking the four questions generally revealed to them the uncomfortable truth—that they were indeed unconscious about their money, and they needed to wise up.

When I used to demonstrate this with large groups of people, I would invite everyone to stand and then sit down if (when) they couldn’t answer a question. So that you can experience the power of those questions for yourself, let’s ask them now.

The first question is really simple: “How much cash do you have on you at the moment, in your pocket, your purse or wallet? Not “about” how much—exactly how much?”

The second question is related, but a little more challenging: “The last time you took £100 from a cashpoint machine, what did you spend it on, exactly?” Typically, in a large group, about half the audience would have sat down at this point. But more recently almost everyone stays standing. What’s going on? Of course, technology has changed the way we interact with cash, so nowadays I have to ask a supplemental question: “The last three times you tapped your phone or watch on a card reader, what did you spend, exactly?” That does it: more than half of the room is now out of the game.

The third question accounts for almost everyone else: “What did you spend last month—and I’ll cut you a little slack—to the nearest £100?” Often, at this point, everyone has sat down, looking somewhat ruefully around the room at each other.

I ask the last question for the one or two still up: “What do you plan to spend next month?” Game, set and match.

How did you do?

Occasionally, if someone was still standing at the end, I would have the opportunity to ask them, “What’s the benefit of knowing?” The answers were very consistent:

“I can enjoy my money knowing that I’m in control of it.”

“I don’t have to worry about whether I’ll have enough to retire on.”

“We never argue about money.”

Isn’t that interesting? Rather than the penny-pinching Scrooge-like characters we might have imagined passing the four-question test, we have people who feel relaxed and in control of their futures. People who have peace of mind about their finances.

Then I would ask, “Who do you think does know the answers to these four questions? Who has to be very conscious of their money?” The answer is, of course, those who do not have enough. People who scrape by from month to month. Not for them the nice choices about where to go on holiday, or where they might eat out tonight. No, they are having to make heartrending tradeoffs between eating and heating, or whether they can afford the extra cost of a school trip, or fix the boiler without resorting to a payday lender.

The problem for people who are comfortable enough to be unconscious about money is that without proper planning, a life of conscious tradeoffs awaits them in retirement. And the behavioural finance literature tells us that change in circumstances is likely to feel very painful. As Professor Robert Merton has often remarked, people want to enjoy a standard of living in retirement similar to that which they enjoyed in the latter years of their working lives.¹ Sadly, for many, this is not going to be the outcome.

Ultimately, what the Back of a Napkin Financial Plan is designed to do is provide a salutary wake-up call encouraging people to start the conversation and take positive action whilst there is still time. And it all starts with four simple questions.