Published by Mark Lookabill, Wealth Advisor | LinkedIn
We spend a fair amount of time talking with our clients about the creation and ongoing monitoring of their Family Index Number. For many, this is an endeavor that they may ultimately not ever utilize. However, I am passionate about stressing the importance of creating the Family Index Number for a multitude of reasons.
There is science and math behind the family index number.
When we work with a family to create their Family Index Number, we start with the very important basics; this includes their income sources, living expenses, and current assets. I frequently tell clients that this is similar to running a business–we want to know what is coming in and what is going out. As a reminder, the Family Index Number is the long-term average rate of return that a family needs to try to strive towards over a full market cycle. This is created in order to meet their long-term goals and objectives, as well as keep them in the lifestyle they’ve grown accustomed to.
This Family Index Number also has a very personal side that I believe ultimately is the most important part of the overall process. This metric is looking forward to what the family’s financial goals and objectives are over the coming years. It does not focus on the past; instead, it allows the family to focus on the future, and what trade-off decisions that entails.
One of the benefits of the Family Index Number is that the focus on overall portfolio returns is taken away from what the markets are doing. Rather, the focus is centered on the individual family situation that is best for them. For a number of people, this is a mindset that they will probably never be able to fully comprehend. They will continue to be focused on what the markets are doing versus what their individual portfolios are doing. When there is a broad market decline, they will realize that they are taking on too much risk in their own personal portfolios for the long-term goals and objectives of their family.
An additional benefit of the Family Index Number is that the number is personalized and authentic. Since it is forward-looking, decisions need to be made so that we can very quickly show different scenarios and potential decisions. With this knowledge, families will have the resources to make financially sensible decisions that will help them remain on track with their long-term objectives.
The ongoing monitoring of the Family Index Number is just as important as its creation. We know that there are going to be long-term changes for family’s long-term plans, and it is invaluable that we have been able to go back and look at different scenarios. Whether it is the purchase of a new home, college funding, or retirement planning, all scenarios can be evaluated to make the best personal decision for the family, as opposed to relying on what is put out there for mass consumption.