“Life is the sum of all your choices.” – Albert Camus, philosopher, author, and journalist.
This is the final article of a four-part series on Financial Success Through Policy Based Decision Making. Earlier articles addressed “WHAT is policy-based decision making?” and “WHY use policy-based decision making?” as well as “HOW to use policy-based decision making.” This article will provide some examples of WHEN/WHERE policies are best used to achieve your financial success.
Developing policies for financial decisions should be done when or where there are strong values and delineated goals. When deciding what areas to develop policies consider what your future self would wish your present self to do now. Save for a boat? Eliminate revolving debt? Take advantage of compounding investment gains by maximizing your 401k now instead of waiting until later in your career?
Examples of policies:
-Savings policy. Goal is to provide adequate retirement assets to maintain lifestyle after working years. Example policy: Once an emergency account of a certain level is established all saving will be done as 401k contributions until on track to reach the annual maximum allowed. Then additional savings goals will be added.
-Debt policy: Goal is to remain ”debt free” (other than home mortgage). Example policy – Will only purchase items on credit when able to pay in full by the end of the month. If desired purchase exceeds ability to pay in full then open another savings account and direct funds each month to account to save the amount needed prior to purchase.
-Sudden money policy (such as an inheritance): Goal is to use sudden money or an inheritance in a manner that is aligned with existing goals and honor the grantor (if an inheritance). Example policy: Up to $xx or % amount will be used for a whole family trip. The next $xx or % will be invested in an appropriate account for long-term/retirement savings. Then all remaining funds will be invested in an after-tax account and 5% will be withdrawn each year to add to lifestyle spending.
Estate planning policy: Goal is to pass along at least a certain amount to each of your children. Example policy: Will purchase and maintain an appropriate amount of long-term care and/or life insurance to ensure the desired level of assets will be available upon our passing.
Investment policy: Goal is to ensure investments are handled in a manner aligned with your risk tolerance and financial goals. Example policy: Will develop and review every 3-5 years an investment policy statement that outlines the allowed investments, and desired asset allocation based on the level of risk one is willing to accept.
Risk Management policy: Goal is to provide full college funding for children and payoff mortgage in the unlikely event that one spouse passes away prematurely. Example policy: Obtain and maintain a level of life insurance on each spouse that would fund college and payoff remainder of the home mortgage.
These are a few examples of when and where financial policies should be developed in advance and utilized. Successful policies will be specific to you/your household and reflect your specific goals.
We are constantly faced with choices. Some choices we make quickly and automatically relying on mental shortcuts. Some choices we agonize over. While other choices are made by default when we don’t consciously make a choice. The field of behavioral economics has demonstrated that people are not always rational when it comes to decision making and even small decisions can impact one’s future. By developing policies, the choice becomes automatic and turns the best choice into the default choice and thereby leading to financial success.
