What is Values-Based Financial Planning?
Traditionally, financial planning has been centered around maximizing the zeros in a person’s net worth. But what good is having a lot of money if we aren’t happy?
This is why values-based financial planning is such an important evolution. And it’s gaining a lot of support from a lot of people. Simply put, values-based financial planning is centered around achieving a person’s most important life goals.
Don’t get me wrong, it still leads to a significantly higher net worth for most people. But that’s more of an outcome versus a goal.
I say this frequently, but it’s worth repeating often: money is just a tool. But it’s probably the most valuable tool on the planet.
In my last post, I shared my 4-step financial decision-making process, which outlines how money can be used as a tool to improve the quality of our lives today, while also allowing us to save more money for the future.
To build on this, I wanted to share an example that illustrates the compounding benefits of using money in this manner.
Because using money as a tool to build our ideal lifestyle is the foundation upon which values-based financial planning is built.
Starting a Family / Retiring Early
I recently began working with a couple that is unable to have a child biologically, despite the fact they really want to start a family together. They’ve considered both adoption and surrogacy. And while they would prefer surrogacy, they always assumed this was out of reach – at least in the near term – due to how expensive it is.
After having a conversation to determine the most important aspects of their lives, we identified their three highest values. Then they took an honest inventory of all their monthly expenses to determine how much they needed to spend each month to serve those values and maximize their quality of life.
This led to an important realization.
There’s actually a giant gap between their household income and what they need to live a great life. And given their lack of savings, it was clear that they’d been unknowingly wasting a lot of money.
This isn’t a knock against them in any way. It’s incredibly common to waste money when we aren’t keeping track of where it’s going.
Consider the fact that more than 30% of paid subscriptions are going unused in the US. And just imagine if there was a way to quantify how much money gets spent each year on needless shopping, entertainment, and other forms of distraction – in an attempt to numb the stress and anxiety that all too often go hand-in-hand with climbing the corporate ladder.
But by viewing money as a tool to serve their highest values, my clients not only created a household budget that improves their quality of life today, they also opened up a lot of new opportunities to exponentially increase their fulfillment and happiness into the future.
Where they previously thought surrogacy was maybe a 2-5 year goal, they’re now planning to start a family next year! What an amazing milestone in life that probably wouldn’t have happened without values-based financial planning.
And where they previously thought retirement would be at least 20 years out, they’re now on track to retire fully in 10-15 years. Or, if they want to downshift sooner than that, they can transition into less demanding / less stressful work in 5-10 years.
Either way, they’ll be able to create more freedom to spend time on the truly important things in life.
Reflective Wealth Values-Based Financial Planning Process
1) Design Your Ideal Lifestyle
The first step of the planning process is to create a vision for your ideal life. This is all about identifying the most meaningful aspects of your life, with the goal of narrowing it down to the three most important ones.
These highest values will serve as your northstar in life. They’re meant to guide all of your decisions, from how you spend your money to how you spend your time.
It creates a foundation to grow significant wealth. And it acts as a personal constitution to hold yourself accountable to creating the best possible life you can live.
2) Identify Your Financial Goals
Once you’ve identified the ideal lifestyle that you want to build, you can start thinking about realistic savings goals.
It’s best to start with the essentials that will promote and protect your financial security. Then move on to more aspirational goals. This is a chance to dream a little bit.
3) Design an Investment Strategy
The heart of your wealth-building plan should always be the investment strategy. This can be thought of as the “engine” driving your wealth over time.
Depending on your goals, your investment strategy should be divided into time-horizon “buckets.” In other words, some money will be invested to achieve short-term goals (5 years or less), some will be invested to achieve medium term goals (5-10 years out), and some will be invested to achieve long-term goals (10+ years out).
This is important because the longer the time-horizon, the more aggressive you can get with your investments.
For example, you definitely don’t want to be investing in stocks for a goal that is just a few years away. If the stock market crashes, you don’t have the time to wait for it to recover and move on to new highs.
4) Review Insurance Needs
It’s important to identify risks that could impact your plan. Generally, insurance is simply meant to protect you from adverse events. It’s not a savings or investment vehicle.
The goal here is to identify any gaps in coverage that expose you to meaningful risks. In other words – now that you have a plan to build wealth, what could potentially derail this plan?
For most people, these things are medical debt and loss of income (either through job loss, disability, or death of a partner/spouse).
5) Basic Tax Planning
For most people, tax planning doesn’t have to be very complex.
Each year, you should have a reasonably accurate estimate of what you’ll owe in taxes at year end, so you don’t under or over withhold from your paycheck. You’ll want to diversify your investments across different types of accounts – with varying tax liabilities – to minimize your lifetime tax bill. And lastly, you always want to use tax-efficient investment vehicles.
6) Basic Estate Planning
The final piece of your values-based financial plan is to have a clear vision of how you will distribute your assets and care for your loved ones, in the event of death.
First, you’ll want to determine who you’d like to inherit your assets, then determine how to ensure they can inherit them without lots of fees and headaches. For most people, this can be done in three steps: proper account titling, proper beneficiary designations, and a will or trust.
And you’ll also want to be sure that, if you have any dependents, they are going to be properly cared for.
Bottom Line
By intentionally aligning your finances with your values, you can ensure you maximize the quality of your life today, the quality of your life in the future, and your impact on your loved ones after you’re gone.
And you’ll also have a much higher likelihood of building significant wealth.