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Spending Well: How thinking like a CEO can change your financial life

Considerations for decision-making about expenditures
Doug and Miranda1 have achieved substantial financial success, yet they both feel uneasy. Before retirement, Doug served as an executive in a large technology company, and Miranda was a successful entrepreneur who sold her business.

Spending Well: How thinking like a CEO can change your financial life image

They transitioned from pinching pennies early in their marriage to, over the years, spending much more freely. Outwardly, they are enjoying a good life filled with nice things and positive experiences. And yet, something seems to be missing. Their spending doesn’t feel entirely under control, and they have nagging questions as to whether their lifestyle is truly sustainable. They also sense their spending is not really aligned with what they care about most. This disquiet has grown to a point where they have enlisted the guidance of their Merrill advisor, Catherine. They want to assess their current spending patterns and develop a more refined spending approach to give them greater peace of mind.

As Catherine listens, she identifies two different but related questions. The first is the practical question: Do I have enough? The second is more philosophical: Enough for what? She suggests the first question might be compared to climbing a ladder. To make the climb, the ladder has to be sturdy and have all its rungs. These are practical considerations. However, in regard to the second question, if the ladder is not placed against the right wall, it only takes the climber to the wrong place faster. Making sure the ladder is leaning against the right wall, and making sure it’s taking you where you want to go, is the deeper, more fundamental, concern.

“The budget is not just a collection of numbers, but an expression of our values and aspirations."


—Jacob Lew,
U.S. Secretary of the Treasury 2013–2017

Many clients at first think that simply understanding their spending patterns and tracking their money is enough. Catherine suggests this might be likened to thinking like a chief financial officer. She notes that while applying these disciplines is helpful, to answer these more profound questions about what truly matters, Doug and Miranda would be better served if they started thinking like chief executive officers (CEOs). Catherine has seen that embracing the role of CEO in their own lives induces a fundamental shift in her clients. Their nagging anxiety around spending patterns and the future are replaced with clarity, a strong sense of purpose and values-driven strategic decision-making.

The new mindset

The first question, “Is my spending sustainable?" is essentially a question about the rate of consumption, and the answer derives from a set of quantitative facts. Catherine notes advisors can tell a client with a high degree of probability whether they have enough wealth to last throughout their lifetime by applying risk analytics and investment planning tools.

By contrast, CEOs are far more interested in production than in consumption. Since Doug and Miranda want to be more mindful about their approach to spending, Catherine advises them to gain clarity about what it is they are trying to produce. While her clients don’t always realize it at first, with a little prodding, Catherine has found they are most often trying to produce the same outcome: a sense of happiness or well-being. 2 Once clients recognize what’s truly driving their spending and shift from asking quantitative questions about money to qualitative questions about well-being, Catherine has noted their spending patterns also shift. Clients who think like CEOs and embrace the production of well-being as their ultimate goal also become more intentional and more confident about their spending, investment and capital allocation decisions. 3

How does one begin to make this shift practically?

In the corporate world, CEOs use a portfolio of financial tools to address vital questions:

Location point icon Where are we now?

Magnifying glass icon Where are we going?

Navigation compass icon How will we get there?

Check mark icon How are we doing?

Location point icon Where are we now?

Magnifying glass icon Where are we going?

Navigation compass icon How will we get there?

Check mark icon How are we doing?


The tools CEOs use to address these questions include profit and loss statements, mission statements and investment policies. While some of these statements are generally created and managed by chief financial officers, it’s the CEO who, with the advice of the executive team, uses them to drive the company. They become essential tools for making strategic decisions, monitoring progress and adjusting course.

Catherine advises Doug and Miranda that these same tools, adapted slightly, can be used to address the production of personal and family well-being. These tools first help catalyze answers to deep questions about what’s most important, but the work shouldn’t stop there. Catherine encountered clients in the past who had developed some of these statements and policies but viewed them as static forms. These clients were missing the opportunity to assess whether their spending was truly aligned with their overarching money goals. Other clients didn’t at first understand how these statements and principles fit together. Individually, these tools are useful. But when used together and treated as living documents, they create a powerfully integrated approach to intentional spending. Collectively, these tools allow clients to take charge of their financial lives—and their personal sense of well-being—as never before.


Location point icon Where are we now?

Using an income and expense statement to assess the current state

In the hands of a CEO, the profit and loss statement (P&L) tells a story about what was important, what was accomplished, what went wrong and where opportunities lie. A personal income and expense statement is similar to a P&L.

Doug and Miranda are like many who kept close tabs on their expenses when they were younger, but loosened up on their budgeting as money became more abundant. This meant they have lost access to important information about their spending patterns and insight into the values those patterns reflect. Catherine reminded Doug and Miranda of the maxim “Show me your checkbook, and I’ll tell you your values." By creating an income and expense statement for a year, Doug and Miranda can more clearly see what values have been driving their spending.

Clients who start tracking their expenses anew often find they’ve been spending less on things they deem important and more on categories that don’t seem so vital. The point here is not to create judgment, but to bring awareness, which opens up a greater range of intentional choices. Some will see no need to adjust, while in others the exercise will catalyze a deep evaluation of priorities and commitments.

While we recommend working with an advisor to create these tools and develop a comprehensive spending plan, some may be more inclined to work independently. Here are a few tactics that have proven to be useful.

  • Start tracking now (perhaps using personal finance software).
  • Don’t feel you have to capture things perfectly, stop at “good enough."
  • A bookkeeper can help you reconstruct your last year’s expenses.
  • Create broad enough categories that you don’t have to be too detailed but enough categories so that you don’t end up with a large “miscellaneous" number.

Magnifying glass icon Where are we going?

Using the wealth purpose statement to guide spending

Companies devise strategic priorities, and use those to guide decisions about how to allocate resources. Similarly, a wealth purpose statement can be a powerful prioritization tool to guide personal spending decisions. For most people, spending decisions are heavily influenced by limitations. An abundance of financial wealth brings more choices, which requires a different level of thoughtful consideration to make expenditure decisions. Moreover, since spending decisions do not happen in a vacuum, and are inextricably linked to decisions on saving, investing, earning and sharing, articulating what “success looks like" is a powerful first step.

Working in partnership with the Merrill Center for Family WealthTM (the Center), 4 which has extensive practical experience advising multi-generational families of wealth, Catherine walks Miranda and Doug through a process to define their intention and move from intention to action.

To help them develop a wealth purpose statement, she asks them to describe their ideal state in terms of what the Center calls the four dimensions of well-being: 5

  1. The individual dimension of well-being: What would be evident if you, and every individual in your family, were flourishing to the maximum extent possible?
  2. The family dimension of well-being: What would be evident if your family as a whole were collectively thriving?
  3. The social dimension of well-being: What would be evident if you (and your family) were focused on making an impact in the world?
  4. The financial dimension of well-being: What would be evident if your finances were prospering?

The answers to these questions comprise a wealth purpose statement that can enable individuals to convert spending into thoughtful investments in well-being. While financial wealth does not automatically create the human, family and social dimensions of well-being, when deployed intentionally, it can become the fuel that allows these areas to prosper.

As you think about your wealth over the long term, do you want to:

Wallet with money icon
Spend it
throughout your lifetime?
Pie chart icon
Manage it
to last but not grow?
Percent icon
Invest it
to grow modestly (e.g., to keep pace with inflation)?
Arrow pointing diagonally up toward the right icon
Grow it
significantly?

Wallet with money icon
Spend it
throughout your lifetime?
Pie chart icon
Manage it
to last but not grow?
Percent icon
Invest it
to grow modestly (e.g., to keep pace with inflation)?
Arrow pointing diagonally up toward the right icon
Grow it
significantly?

Useful resources

  • A skilled facilitator can help take these discussions to a deeper level. Your advisor can work with you directly or connect you with tools, such as the Center’s values and communication cards (developed in collaboration with the Money, Meaning & Choices Institute), to bring clarity to your own understanding of the purposes of your wealth. For example, identifying the importance of preserving wealth across generations allowed one couple to not only better calibrate their spending and investing but to also realize the importance of beginning the dialogue with their children, to manage expectations on gifting.
  • We often find one of the impediments to uncovering the deeper purposes of wealth is old patterns of behavior based on beliefs about money learned in early life. Advisors can guide you through a process to discover the old “money scripts" that may not be serving you well today. For example, it was not until two spouses acknowledged the conflicting money messages they grew up with and had internalized (“money doesn’t grow on trees" versus “easy come, easy go"), that they were able to honestly reflect and align on their collective approach moving forward.

Navigation compass icon How will we get there?

Generating roadmaps using principles, investment policy statements and spending plans

To inform their current plans, CEOs look at both historical performance and strategic priorities for the business. Individuals can similarly operationalize their priorities by assessing the current state of spending and by identifying core values that will guide spending, which are tied closely to the wealth purpose statement.

1. The statement of principles

The statement of principles distills the core values articulated in your wealth purpose statement into actionable ideas that will guide your use of money, including spending and investing. This statement should consist of four to six easy-to-remember directives. Some examples include: “Invest in experiences, not things," “Think before you buy," “No family gifts without skin in the game." Your principles should be your own.

Useful tips

  • Write out between eight and 15 principles, then cut them down and edit them to identify a few you will remember and act upon.
  • If you need help, work with your advisor to craft these.

2. Investment policy statement

Your spending decisions should be linked closely to your broader investment strategy. We recommend using the wealth purpose statement and statement of principles to develop an investment policy statement (IPS), which will in turn guide your investments. In your IPS, you will articulate your investment goals and objectives and the strategies your investment advisor should employ to meet these objectives. 6 The IPS should also address matters such as the investment time horizon, target asset allocation, risk tolerance and liquidity requirements, frequency of monitoring, benchmarks for measuring returns, and the periodic review and modification of the statement. It might also include directions about the environmental, social and governance (ESG) 7 practices of an investment and socially responsible investing.

Useful tips

  • Your advisor should be the one to draft your investment policy statement, subject to your review, based on substantive conversations with you.
  • The investment policy statement should be a working document, revisited during every portfolio review and updated to reflect major life changes.

3. Spending plan

A spending plan draws from all the exercises and tools mentioned. Starting with the income and expense statement, the spending plan includes an additional column labeled “anticipated." Put amounts next to each category that reflect your re-evaluated spending priorities over the next year. These amounts should derive from careful analysis of your prior year’s income and expense statement, your wealth purpose, principles and investment policy statements. We suggest you carefully review these new numbers again, to make sure they align with your true priorities, and to ensure you are putting your money where your heart is. Discuss how this plan reflects your investment in the personal, family and social dimensions of well-being.

Useful tips

  • Consider reframing the question from “Can I spend this amount on x?" to “Should I spend this amount on x?" Check your wealth purpose statement and principles to help guide you to the answer.
  • Take into account the factors of “lifestyle creep," recurring expenses and exit strategies for large purchases. For example, one client was considering the purchase of a private jet and worked with their advisor to assess costs and benefits of owning versus leasing versus charter approaches. The analysis showed that over the long term, the cost associated with outright ownership outweighed the benefits. Instead, the family opted to purchase a jet share for flying to hard-to-access cities and decided to fly commercial for cross-country travel.
  • Engage in “prospective hindsight" by imagining the spending event has already occurred and consider two future scenarios — one positive, one negative. For example, if you’re debating whether to purchase a new car, imagine what assumptions would have to be true to make the purchase go brilliantly versus fail spectacularly.
  • Monitor your spending plan quarterly, at minimum.

Check mark icon How are we doing?

Using the family balance sheet

At minimum, a balance sheet provides a snapshot of assets and liabilities. In the corporate world, the balance sheet is a critical tool for planning and examining the deployment of financial capital over time. Many individuals don’t have a robust balance sheet that allows them to engage in deep analysis about their progress toward their most important goals. Unlike a simple financial analysis of assets and liabilities, as you put together a balance sheet, you might also include your intangible wealth, 8 corresponding to the different forms of well-being noted earlier. Intangible wealth can include individual capital (the growth and development of individuals in the family), family capital (the strength of the culture of the family as it learns together and prepares for the future) and social capital (the impact the family has on the world).

Useful tips

  • Some families create an annual report that includes both financial information and also reports on other forms of “capital."
  • To report on non-financial forms of capital, imagine you are writing a more formal — and perhaps more candid — version of a holiday letter. With both optimism and honesty, answer questions such as: How are individuals, the family as a whole and our social engagement better than they were a year ago? Which milestones were reached? Where do we need to do better? What impact have we had in the world beyond us? What challenges lie ahead?
  • These reports include narratives, pictures, graphs and other aids which describe how the family has grown and developed over the year.
  • Financial capital information is shared with family members only when it’s the right time. If that time has not yet arrived for your family, you can create a qualitative report by including the other three capitals.

By undertaking this journey with Catherine, Doug and Miranda learned how thinking like the CEO of their financial and personal lives meant gaining clear and aligned knowledge about their values. They developed the entire suite of tools and, with Catherine’s help, made sure the documents were actionable, integrated and consistent. They also set up a regular schedule to revisit these statements and gauge progress on how well their plan is doing at generating the well-being they are seeking. The couple invited Catherine to hold them accountable in their annual reviews together.

As a result, Doug and Miranda are experiencing much greater peace of mind. Questions about what to buy, what to gift, how much to save and how much to invest have become much simpler to answer, and they no longer have nagging doubts: They know exactly why they’re making those decisions.

Wherever you may be on the continuum of translating your intention into action, we encourage you to team with your advisor and leverage their specialized resources, to:

1

Assess the current state: Develop a current income and expense statement

2

Articulate what success looks like to you:
Define a wealth purpose statement and statement of principles

3

Tie your goals to your portfolio: Update or develop an investment policy statement

4

Pull it all together: Develop a spending plan

5

Check-in on progress: Develop and maintain a family balance sheet

Spending well process

Image detailing the six-step spending well process. Image is in the shape of a circle depicting a wheel with progression images of arrows indicating the six sections. At the top of the wheel is a small circle labeled Start Here with an arrow pointing toward the right.The first arrow contains-
Bold title Assessment text below it reads bold subheading Income and Expense Statement text below defines it Tracks historical income and expense patterns for the past year. The second arrow contains- 
Bold title Vision text below it reads bold subheading Wealth Purpose Statement text below defines it Identifies how you want to use your wealth to develop family members individually and collectively and contribute to society. The third arrow contains- Bold title Grounding text below it reads bold subheading Statement of Principles text below defines it Distills the core values articulated in your wealth purpose statement into actionable ideas that will guide your use of money including spending and investing. The fourth arrow contains- Image of an arrow wrapping around this section which is then divided into two sections four and five. The first section bold title Plan, text below it reads bold subheading The Spending Plan text below defines it Using your Income and Expense Statement adds in target spending in each category in a way that aligns with all of the other documents. The second section includes a separate arrow pointing outside of the wheel bold title Direction text below it reads bold subheading Investment Policy Statement text below defines it Identifies how you want to invest in ways that are consistent with your Wealth Purpose and the Statement of Principles to achieve your vision. The sixth and final arrow contains- Bold title Monitor text below it reads bold subheading  The Family Balance Sheet text below defines it Evaluates your progress toward your core vision by holistically evaluating both the quantitative and qualitative criteria to achieve well-being.


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