Goals-based planning
Your strategy may be sound, but it may need some adjusting. Here’s how to plan for your spending needs in any market cycle.
At a certain wealth level, the idea of “budgeting” may no longer be relevant. So let’s say right off the bat—this is not an article about budgeting. Instead, we discuss how you can plan for your lifestyle spending so that you can move forward confidently in all aspects of your financial life.
Even if you have more than enough money to support your lifestyle, it’s important to establish your annual spending number in order to set yourself up in other areas, like leaving a legacy for your family or growing your assets in perpetuity. Understanding your annual cash flow needs is the first step in defining your lifestyle “bucket” so that you can set aside resources and invest it appropriately to meet the spending needs and wants that you and your family will have over the course of your lifetimes. The lifestyle bucket is one of four in a wealth plan (the others are liquidity, legacy and perpetual growth). To learn more about the bucket framework, see here.
Bear in mind, this lifelong spending bucket is entirely separate and distinct from the liquidity bucket. That covers operating cash flow, near-term big ticket purchases and opportunistic investments, while allowing you to sleep well at night. Funding the liquidity bucket comes first.
In contrast to a liquidity bucket, a lifestyle bucket contains long-horizon financial and investment resources—set aside in a “lockbox” strategy.
Here’s how you can be deliberate and intentional in setting up a lifestyle bucket for your family’s financial life. We’re including a framework to help you get started, questions to think through and strategies that may be well aligned with your needs.
Components of your lifestyle bucket
The overarching purpose of a lifestyle bucket is to help provide a strong foundation for financial security. If, for example, you were faced with a large loss of capital in a business or concentrated investment, or suddenly became unable to work—you’d have money set aside to allow for a comfortable life.
So what actually makes up lifestyle spending? These three categories can help you identify your lifestyle needs:
Spending for yourself: Food and dining, clothes and other luxury items, home maintenance and household staff, travel, ongoing large purchases—the nuts and bolts of daily life.
Spending for your family: Gifts to family members, tuition for children and/or grandchildren, wedding expenses, upkeep of the family’s summer home.
Spending for your community: Community-minded gifts such as donations to your alma mater or religious organization, or other charitable contributions and philanthropic bequests.
Questions to ask yourself
When you make a wealth plan, you’ll want to think through the various goals that align to each of your buckets. Keep in mind that each goal has four components: a desired dollar amount, time horizon, priority level and a label.
Here are some questions you can ponder to arrive at the specific goals within each lifestyle spending group.
Spending for yourself: How much cash do you need for essential and discretionary expenses? Is an expense truly discretionary, or do you really consider it as non-negotiable for your family? Do you have a buffer included for the “one time” expense that typically pops up on an ongoing basis? (We all seem to have this one; it might be a new car one year, home improvements the next, etc.) Do you anticipate any significant changes to your lifestyle needs over time? How certain do you want to be that you can provide for these expenses?
Spending for your family: Are there any goals related to family members or loved ones that you view as effectively part of your lifestyle needs? Children’s or grandchildren’s education costs? Healthcare expenses for an aging parent or adult child with special needs? When will these outlays start, and how long will they last? Are you willing to adjust any of these goals, either in dollar amount or duration?
Spending for your community: Do you have any ongoing charitable giving that you consider part of your lifestyle? This might include gifts to your religious organization or alma mater, or a cause or philanthropic organization that is important to you. When will these gifts start, and how long will they last? Will the giving amount be constant, or will it change over time?
Let’s get specific. Here’s an example of how you might align capital from your overall portfolio to fund your lifestyle bucket (see graphic).
This chart provides an example to help articulate what’s in your lifestyle bucket. For instance, you can add up the capital needed (annually) for you and your spouse/partner (e.g., food, clothes), your family (e.g., college education), and your community (e.g., donation to alma mater) to calculate your total annual spend. How much do you need to set aside right now in order to spend with a high degree of certainty this amount per year for the rest of your life?
Choices and decisions: Time horizon and risk tolerance
Once you have created your lifestyle bucket, it’s time to make some decisions. How will you treat the assets within the lifestyle bucket? You can choose among a range of products and strategies across banking, investing, planning and lending. Your time horizon (when you need these resources and how long they need to last) and your own risk tolerance will determine which strategies make the most sense for you.
For instance, if you’ll be investing with a long time horizon, taking measured, appropriate risk likely makes sense. But if you’ll need large portions of the lifestyle bucket in the near future, dialing down that risk and becoming more income focused may be a critical consideration.
Be mindful of the account types and which account to place each investment in as you consider this bucket. Maybe you have a blend of accounts that have differing tax treatments and degrees of access (personal accounts versus retirement accounts versus trusts, etc.). You want to make sure you can access the resources aligned with these goals when you need them, and without adverse tax consequences.
Finally, follow these steps to keep track of your lifestyle bucket and avoid potential disruptions. First, consider how often you’d like to review your lifestyle bucket—and determine how you’ll assess if the amount set aside needs to be adjusted (up or down) as your priorities shift and life evolves. Second, if you are still earning income and your lifestyle relies on that income, consider taking out a life insurance policy. Lastly, for spending related to family members, contemplate how you’d like to communicate with them, before allocating resources, to ensure a sense of procedural fairness (an education spending policy, for example).
Final thoughts
Going through the process of articulating your lifestyle bucket can be enlightening. Maybe you discover you’re spending too much or too little relative to your wealth level. Maybe your plan is essentially sound, but needs just a little tinkering. Keep your eye on the ultimate goal: Make sure you have allocated enough money to your lifestyle bucket and are investing it appropriately —and in the optimal account types to meet your family’s lifetime spending needs so that you can move forward confidently in all aspects of your financial life. We believe our three-element approach—identifying spending for yourself, your family and your community—can help guide your thinking, and deepen your conversations with your family and trusted professionals.
