Developing Family Values with Financial Planning

Developing Family Values with Financial Planning

October 20, 2023


“There are basic principles of effective living, and people can only experience true success and enduring happiness as they learn and integrate these principles into their basic character." – Stephen Covey, Seven Habits of Highly Effective People

Financial planning is commonly viewed as a discipline focused on enhancing net worth, minimizing taxes, and securing financial stability. And while these objectives are undeniably important, this perspective inadvertently overlooks the profound capabilities financial planning can achieve. At its most fundamental level, financial planning functions as a framework for developing and solidifying your family's core values.

Drawing upon Stephen Covey's philosophy of decision-making, values-based financial planning transcends the boundaries of traditional financial goals. It serves as a disciplined approach for not only developing but also solidifying your family's core values—elevating financial planning from a transactional activity to a truly transformative family experience.

In this discussion, you will gain insights into:

  1. The pivotal role principles and values play in lasting financial prosperity.
  2. The limitations and biases inherent in traditional financial planning methods.
  3. The benefits of a values-based 'operating system' for making financial decisions.
  4. The process for implementing a values-based approach to financial planning. 

By the end of this exploration, you'll understand that financial planning is not simply a means to achieve financial milestones but an invaluable practice for aligning your life choices with your family's deeply held values.

The Importance of Principles and Family Values in Financial Planning

"Prosperity, to be stable and enduring, must rest on a solid foundation of principle." – James Allen

These words encapsulate an often-overlooked truth in the realm of financial planning. While many focus on balancing budgets, choosing the right investments, or setting financial goals, the true essence of effective financial planning delves much deeper.

At the heart of any lasting prosperity is a sturdy foundation of core principles. Much like a solid architectural design ensures the stability of a physical structure, these principles govern the resiliency and longevity of our future financial structure. In an increasingly complex economic landscape, it's easy to get bogged down in the details and overlook the foundational elements that give real substance to our financial decisions.

According to James Allen, our material world reflects our mental state. This suggests that our financial standing is not just a result of our actions; it is deeply intertwined with our internal values and belief systems. Every financial decision—from large investments to daily expenditures—serves as a mirror, reflecting our core principles.

Stephen Covey emphasizes the significance of universal principles in decision-making, reinforcing the idea that qualities like integrity, responsibility, and honesty should serve as the bedrock upon which all decisions are made.

Consider your financial plan as a classic car waiting to be restored. The quality of the parts you choose and the expertise in putting them together represent your tactical financial decisions. But it's your overarching restoration plan, guided by your core values and principles, that ensures your car runs well, and also retains its original essence and value.

When you align your financial planning with your intrinsic values, you're doing more than just making the car roadworthy—you're ensuring it stands as a symbol of what you believe. Your financial plan then becomes more than a checklist of tasks; it turns into a set of guiding principles that adhere to and complement your values, steering you toward a life of greater meaning and satisfaction.

In making a personal commitment to good financial stewardship, you're investing in a legacy that will endure beyond your lifetime. You're not just accumulating assets—you're also preserving and fostering values that you can pass on to future generations. Much like a classic car becomes more valuable and resilient after its authentic restoration, a financial plan grounded in strong values retains lasting worth and sustainability.

Limitations and Biases Inherent in Traditional Financial Planning Methods

Commission-Based Financial Planning: The Advisor-Dictated Needs

In the commission-based model, advisors conduct a needs analysis to prescribe financial products like insurance policies. Although it seems client-focused, this model allows advisors to set specific financial goals. For instance, an advisor might suggest you need a $2 million life insurance policy to maintain a certain lifestyle, even if your core values prioritize something entirely different. Essentially, the advisor's incentives are often based on the potential for higher commissions rather than achieving the personal priorities that reflect your life goals.

Assets Under Management (AUM): Crafting a One-Size-Fits-All Lifestyle

In the AUM model, financial advisors charge a fee based on a percentage of the total assets they manage for you. For instance, if an advisor manages $1 million for you at a 1% fee, you pay them $10,000 annually. This model represents an evolutionary step forward, better aligning advisor-client incentives compared to the commission-based model. However, it unintentionally leads to a one-size-fits-all financial lifestyle geared towards rapid asset accumulation.

Consider an individual who views a classic car restoration as more than just a financial investment. To this person, the project embodies core values like hard work, preservation of history, and bonding time with family. However, directing funds into this restoration would reduce the assets under the advisor's management, thereby affecting the advisor's fees. Consequently, the advisor might discourage the classic car restoration investment, missing a significant opportunity to align the client's financial strategy with their deeper, value-driven objectives.

Similarly, paying off a mortgage early or investing in starting a business can be significant life goals rooted in values like achieving financial independence and being able to pursue novel ideas for someone who has an entrepreneurial spirit. However, these actions would also reduce the available assets under management, possibly leading to advice that doesn't fully support your life goals.

 

Fixed Fees and Comprehensive Financial Planning: The Era of Goals and Complexity

The shift to fixed-fee comprehensive financial planning takes another step forward in aligning client-advisor interests. Here, advisors earn established fees by offering a wide range of services like investment management, estate planning, and tax strategies. This model often employs goal-based and cash-flow-based planning, allowing for a more tailored approach to your financial life.

However, while advisors hired for this type of engagement may encourage you to set goals, sometimes these financial objectives become overly elaborate. In this model some advisors create complex strategies to justify their fees. The focus may shift to optimizing complex tax strategies, for example. This can lead to structuring your life around tax codes and the whims of Congress, rather than living a life based on what truly matters to you.

 

Life Planning, Opportunity-Based Planning, Financial Coaching, and Behavioral Finance

Life planning, championed by individuals like George Kinder, aims to your financial goals with the life you envision. This method encourages you to dream big, to visualize your ideal life, and then develop a financial strategy to bring that vision to fruition.

Alongside the rise of life planning, opportunity-based planning has emerged as another innovative approach. Instead of focusing solely on predefined goals, this method helps clients explore a range of financial possibilities. By understanding their options, clients can continually refine their objectives and set new, more enriching goals they may not have considered previously.

The financial industry has also developed financial coaching and behavior-based finance strategies. These disciplines address a critical gap. Even when detailed financial advice is valuable, research shows that clients fail to implement it up to 50% of the time! Financial coaching and behavioral finance seek to understand not just what you should do with your money, but why you make the choices you do, exploring your psychological relationship between saving and spending.

The focus here is not merely creating an investment strategy. The emphasis is on methodically identifying and implementing actions to achieve your goals. While all of these approaches take significant steps forward from the perspectives of years past, they often miss one crucial element: motivation. One of the most powerful motivators is the feeling that you are living in accordance with your core values and beliefs—fulfilling your purpose in life.

When your financial plans and actions are tightly bound to what genuinely matters to you, it invigorates and inspires you, which makes achieving those plans far more attainable. This planning model is the next frontier, and it's one that values-based financial planning is designed to conquer.

 

Bringing Your Core Values to the Forefront

Including all these financial components—each one like a different tool in a mechanic's toolbox—can be critical in restoring and maintaining the classic car of your financial dreams. You need each tool to provide both efficiency and quality work. The absence of core values as the focal point, however, can allow for biases and pitfalls to seep in. While some advisors have done an excellent job customizing the investment strategy for individuals, values-based financial planning brings this focus to the forefront. It makes core values not just a background consideration but the central pillar of your financial planning journey. 

By avoiding a myopic view and integrating your family's core principles and values, financial planning based on your moral compass and personal goals revolutionizes how you think about your financial life and, as a result, how you live. Each financial decision becomes a reflection of your family values.

Aligning Your Finances with Your Core Values

Stephen Covey aptly stated, “Principles are the terrain, and core values are the maps.” Principles like charity and honesty are unchanging truths that serve as the foundation of your financial life. These principles are then articulated into core values that resonate with you personally. For example, if charity is your principle, a core value may be: “It's better to give than to receive.”

Now imagine you're faced with a financial decision—perhaps whether to donate to a charity. This is where your core values come into play. They act like a lens through which you view your options, making the decision-making process simpler and more in keeping with who you are. Of course, this is a simplified example; in real life, you have multiple core values acting in concert to guide your decisions.

These core values serve as your internal operating system, providing consistency and assurance in an ever-changing world. Whether tax codes shift or political climates change, your core values remain the same, enabling you to navigate life's complexities with a sense of purpose.

Stephen Covey also stresses the significance of developing a mission statement as a personal 'constitution' that encapsulates your core values and principles. This mission statement isn't static; it evolves with you but always points you in a direction that accomplishes your core values.

Regular dialogues, whether personal reflections, discussions with family, or consultations with a trusted financial advisor or coach, are essential in keeping your financial life in sync with your core values. These conversations are not merely meetings but ongoing opportunities to ensure your financial choices are grounded in enduring prosperity.


Values-Based Approach to Financial Planning

Once you've established your core values and internal operating system, it's time to delve into financial planning. Imagine walking into a gym without a clear plan. A fitness coach might give you a standard routine, but without understanding your specific goals, you may lack the motivation and insight to stick with it. This results in a program crafted more by the coach's vision than your own.

However, when you approach financial planning with well-defined principles and core values, it's like telling that fitness coach exactly which muscles you wish to develop and why. This changes the game completely. Your financial advisor can now tailor a program that mirrors your values and works toward your objectives, making your financial journey purposeful and engaging.

For example, if your principle is charity, with a core value of “It's better to give than to receive,” you may set financial goals that include regular charitable donations. Likewise, if your principle is knowledge, and your core value is “Knowledge is power,” your financial plan could involve setting up a specific budget for educational pursuits, whether for you or your children. These aren't merely financial goals—they're exercises to strengthen your core values.

The financial tools you've used before now become instruments to help you live out your core values and principles. Each financial goal becomes like your own personal workout routine designed to build these core value ‘muscles,' a model based on enduring prosperity.

Conclusion

As we've navigated through the historical shifts in financial planning, it's clear that modern approaches provide more personalized pathways. However, leaving your finances up to an advisor can often feel like leaving your classic car at a mechanic shop. Over time, decisions made by these external influences can cause a gradual drift, altering the overall character of the car until it bears little resemblance to the history you intended to preserve.

Values-based financial planning offers a different approach. It invites you into the metaphorical garage to work side-by-side with your trusted mechanic, turning each financial decision into a strategy infused with your core values. The decisions you make then become more than just financial strategies; they are opportunities for preserving history and bonding with family over shared principles. Your financial plan evolves into a living testament to your values, a legacy that reflects your current priorities and also sets a precedent for future generations.

So, as you navigate the financial landscape, keep these truths in mind. Your family’s financial plan is not simply a static arrangement of numbers or a set of outsourced tasks. It's an ever-evolving legacy requiring active, values-based stewardship. Your goal is to craft a financial strategy that endures as a vibrant representation of the values and principles you and your family cherish.


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