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Wealth Assessment Survey: Spending Policy

January 4, 2011
by Jack Reynolds

This is the third e-Newsletter in a series that discusses six key factors that are influencing your wealth environment today. The six key factors are based on the results of a Wealth Assessment Survey I conducted in November 2010. Based on the survey, Investment Strategy was ranked as the most important factor influencing your wealth environment and Family Dynamics was ranked as the second most important factor.

Spending was ranked as the 3rd most vital factor influencing short-term decision-making and long-term goals. This week’s e-Newsletter is dedicated to discussing the most important elements for individuals and families to consider when developing spending policies that will help them achieve their financial goals. The three remaining factors affecting wealth environments are fiduciary services, governance and wealth management which will be discussed in future e-Newsletters.

If you would like to receive a complimentary assessment of your personal or institutional wealth environment, please contact me at (617) 945-5157 or email. As always, I look forward to receiving your questions and comments.

Wealth Assessment Survey: Spending Policy

Spending is a critical factor influencing your personal or family wealth environment. A spending policy needs to be established in the context of your long-term financial goal, since the two are interactive. For example, if your financial goal is to grow your assets for later enjoyment, then you will need to establish a more modest spending policy than if your goal is to exhaust your assets during your lifetime.

Below, are six essential elements for developing a spending policy that will help you achieve your financial goal. Your spending policy needs to comprehend each of these elements in order for you to determine whether your long-term financial goal is realistic. Let us suppose for example, that your long-term financial goal is to grow your assets vigorously for your future enjoyment (or for future generations), and you have a moderate tolerance for risk. You will want to modulate your total spending (broadly defined as the sum of these six essential elements) in a way that permits you to achieve your financial goal.

As you develop your spending policy, it is more important to focus on spending as a percent of investment assets.This will foster a meaningful dialogue across multiple persons and asset pools without referencing absolute spending or the scale of your assets. Further, although it is tempting to use total assets (as opposed to investments) as the denominator, you would be well advised to exclude such items from your spending policy base. Non-investment assets (such as personal use real estate, collectables and vehicles) may or may not produce quantifiable returns; and you would be better off not having to liquidate your non-investment assets in order to support your spending rate.

As you go through this exercise you might find that you have more control over some key elements (e.g. planned lifestyle spending and discretionary spending) than others (e.g. taxes and inflation). It is important to review your spending policy with your designated advisor periodically so that s/he can help you evaluate the degree to which your spending policy and financial goal are in sync and if necessary, refine facets of overall your investment strategy.

How to Develop a Spending Policy for Individuals and Families

From an individual or family perspective, Spending includes:

  • Planned Personal Lifestyle Spending
  • Taxes (federal, state, county, city, property and other)
  • Inflation
  • Gifts (intra-family and charitable)
  • Discretionary or Non-Recurring Spending
  • Involuntary Transfer Allowance
  • Lifestyle Spending

    When we think about spending, most of us stop right here. Lifestyle spending is what you spend in order to conduct your life in the manner to which you are accustomed. Your lifestyle spending may or may not include earned income, inheritance, interest income, proceeds from the sale of a business, etc. Identifying lifestyle spending as a percent of your total investment assets is an essential element for determining your spending policy, but it is not the whole story. The five other elements listed below also merit attention for you to achieve your long-term goal.


    Taxes are an inherent element of spending. It is important to estimate all of your taxes as a percent of your investment assets. Be sure to include taxes on earned income, payroll taxes, dividends, interest and capital gains taxes as well as property and excise taxes, etc.


    In addition to personal lifestyle spending and taxes, you need include an estimate of long-term inflation as a percent of your investment portfolio. It is important to think about inflation as a form of spending because inflation is an involuntary removal of asset value from your investment portfolio. Think about inflation as a form of taxation that must be recognized in order to determine whether your spending rate is consistent with your long-term financial goal. If you do not have an estimate for inflation, history suggests that an annual “tax” of 3% of your investment assets is not an unreasonable approximation of long-term inflation.


    It is wise to include an estimate of intra-family gifts, education costs and charitable gifts (including the amortization of outstanding pledges) as a percent of investment assets in determining your spending policy. Including gifts will help you evaluate whether your total spending rate is consistent with your financial goal.

    Discretionary or Non-Recurring Spending

    You need to add an allowance for discretionary or non-recurring spending. You may think that all of your unexpected expenses are behind you; however, it is not uncommon for individuals and families in virtually every income and asset strata to experience unanticipated spending needs beyond their planned spending policy. The frequency of unanticipated and non-recurring expenses varies however, they are seldom nil over the long-term. It may be helpful to think about discretionary spending in terms of total dollar (or other currency) amount and then convert that amount to a percent of investment assets. This will permit you to appraise your total spending rate relative to your investment assets and ultimately, within the context of your financial goal.

    Involuntary Transfers

    Finally, I suggest that you include involuntary transfers such as uninsured property and casualty losses, legal judgments, alimony, partially uninsured health issues, and other such unforeseeable events. I propose addressing this contingency planning in dollars (or other currency) and then converting it to a percent of your investment resources for reasons articulated earlier.


    Once you have completed the foregoing exercise, I suggest you add up each of these six (6) key elements as a percent of your investment assets. The sum of these percentages needs to bear a close relationship to your long-term financial goal as well as your tolerance for risk, quantified investment objective, asset allocation and other elements of your overall investment strategy.

    Developing your spending policy in coordination with your long-term financial goal and tolerance for risk will allow you and your designated advisor to adjust your quantified investment objective and asset allocation. Together, these policies will help you shape your investment strategy.

    IfIf you do not have a designated advisor to assist you with this exercise and would like to discuss these matters with me in more detail, please email me or give me a ring at (617) 945-5157.