3 Reasons For a Financial Planning Policy Statement

Making financial decisions can be downright tough, complex, and can make us feel very emotional. Even a single decision could have an impact on multiple parts of your life. There are lots of moving parts and it seems like every decision in personal finance has a different answer depending on who you talk to. Even worse, during turbulent times (think the ‘08 financial crisis, presidential changes, or COVID, job change, marriage, divorce, promotion, death) you’re tasked with having to stick to a long term plan when faced with short term volatility.

How do you balance all of this out? How can you improve your decision making process? Well, the great news is that there is a way to make decision making easier. You can put together a set of rules or policies for your money that can take out the emotions involved in the decision making process of personal finance. The idea of setting up rules and policies for financial plans, known as a Financial Planning Policy Statement, was originally brought about by “Yeskie and Buie” and in a later article by Michael Kitces.

financial planning policy statement process

The idea is to go through an ongoing discovery process to connect your ‘why’ and your ‘how’. The ‘why’ being your goals, beliefs, your background, and your overall feelings regarding money. The ‘how’ being traditional planning topics such as income, expenses, your assets, and liabilities. The end result is a statement or policy that governs how you’re going to make decisions regarding your money.

For example, if you experienced a lack of liquidity due to your experience with the ‘08 housing crisis, you might feel more inclined to carry more cash than what is considered normal. Or if your parents raised you in a household that stressed the importance of saving, maybe a high savings rate is important to you.

Such policies lead to planning rules such as, for example:

-I’ll always save 20% of my gross income for retirement.
-I will always be 100% in the stock market until age 50.
-Any purchases that exceed 10% of my gross income will be used with amortized debt.
-My mortgage payments will never exceed 36% of gross income or 28% of net income.
-My portfolio will never exceed more than 20% of one equity (stock) position.

The process of developing your rules and policies should be very deliberate. You should have an understanding of your own core beliefs and values. This will help guide your decisions and define key metrics such as your savings rate, your spending rate, how much to give to charity every year, and your debt rate. For example, should you save a higher amount of money now and sacrifice spending money on experiences or should you save a lower amount now with the understanding that you will have to work longer in your later years, but with the benefit of getting to experience more in our earlier years. There’s no right or wrong answer to this question and our background, beliefs, and values will guide our answer. The point is to dig into your ‘why’ to connect it to your ‘how’ which will lead to the development of your rules and policies that will guide our decision making process.

And this process isn’t meant to be hypothetical. See below an example of what an actual financial planning policy statement looks like.

And last but not least as the title implies, here are the 3 reasons why you should be following a planning policy statement:

  1. Take emotion out of decisions: Money will always make us emotional. And that’s ok! We’re all human and we all make emotional decisions. Instead, what you can do is proactively address your emotions ahead of time through the usage of rules and policies and set boundaries on what makes sense for you. Overall, your decision making will improve by creating a guardrails when things turn inevitably sour. When the market is down are you going to sell everything or should you instead stick to your policy statement and rebalance into the low prices? One decision seems more prudent than the other. 
  2. Helps build strong relationships: Are you newly engaged? Or maybe you’ve been married a while and need to rehash your money habits and style? Have you and your partner sat down and really discussed how you want to handle your finances together? Putting together a financial planning policy statement can help you both explore your ‘why’ and connect that to your ‘how’.
  3. Dynamic planning: Financial Planning is a verb, not a noun. The dynamic nature of the policy statement allows you to take into account life’s changing circumstances such as marriage, newborns, and work promotions.
  4. BONUS:  Are you working with an advisor? By working with an advisor who is implementing a policy based planning framework, you’re choosing to work with someone who is concerned about connecting your ‘why’ with your ‘how’ and less focused on trying to fit their products into your plan.

And that’s all I have for you today. I hope this was helpful and I truly hope you begin implementing a financial planning policy statement to take control of the decision making process in your life. If you have any questions, feel free to reach out and as always, I’ll see you out there!

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