Updated: Aug 28, 2020
Your family is similar to a corporation—it’s a group that needs to make money and use the profit wisely to continue to exist and to grow. Decisions made by one or more members affect the outcome of the family entity as a whole and the individual parts that make it up. By acting like a thriving corporation, your family can be more successful.
A McKinsey report offers several characteristics shared by corporations who make good decisions:
Big-picture thinking – evaluate the decision as part of the firm’s comprehensive decisions, putting organizational goals ahead of business unit goals and building consensus across business units.
Transparency – rely on openly discussed criteria for the decision
Manage risks – pay attention to the risks of the project, examined through the financial ramifications, sensitivity analysis and the relationship of those risks to the risks of other projects
How do each of these translate to your own family financial operations?
The Big Picture
In your family, you’ve got just one pot of money for everyone. When the money is gone, the pot is empty for everybody. How do you decide to use the family money so that it meets everyone’s needs without running out? In our family, we've tried to create an environment where each of us in our family can use the money we have to satisfy needs and wants. That requires compromise, and inherent in compromise is that no one gets exactly what they want. It’s helpful when families tend to like the same sort of thing like sports or adventure travel so funds can be directed toward those ends. But even when family interest are diverse, knowing your turn is coming can make it easier to wait while family money is used to advance another’s goal.
Being open about family finances can help when there are delays. Organizational expert Steven M.R. Covey defines transparency as being based on principles of honesty, openness, integrity and authenticity, where everyone can see what is transpiring. In a company it means keeping employees aware of plans and policies that affect them. In your family, it means being honest about your financial means, within limits. Unless you want your child’s kindergarten teacher to know too, you probably don’t want to tell your five-year-old how much you make, but kids need to know where family finances stand. When financial circumstances change for the worse, explain the situation in a way your children can understand to reduce the anxiety that can come from trying to hide a money shortage. (For more family financial tips, see: Financial Tips for Parents on a Budget.)
Manage Financial Risk
Like managers in a company, when someone in our family wants to do something that costs money and/or time, we ask candidly if it is safe, legal and affordable. These questions work for families of all socioeconomic levels from those with very little who are deciding if they can afford a second car to wealthy families who are trying to figure out if they should buy a yacht or a Lear jet.
· Is it safe? The definition of safe certainly varies depending on the person doing the evaluating. Our kids when little would have said that sliding down stairs head-first was safe, we knew different. I’m so clumsy even cleaning out the shed isn’t safe for me. As the parent, you define the physical and emotional safety parameters for your family members to save money and heartache.
· Is it legal? In today's environment, actions formerly considered pranks can be considered felony offenses that could permanently derail a young person's life. When I was young, things like fake IDs, drunk driving and blowing up mail boxes carried little risk of substantial punishment. The parents of today’s little ones won’t be able to look the other way as our parents often did, and the costs of a legal mistake can crush a family. (For more about family financial pitfalls see: How to Protect Family Finances When a Child Makes a Mistake.)
· Can our family afford it? Life offers so many good opportunities, but most of them cost money. How do you decide who gets to do what in your family and when? Keeping the big picture in mind while openly discussing risks and long-term goals helps provide the evidence for why a particular lesson or activity is out of reach for your family. Kids are amazingly resilient about dealing with truth. If you cry "poor house" artificially to your kids, they’ll ferret out the truth somehow and stop working with you to economize, but if they see their parents doing everything they can to earn more and spend less on themselves, the kids are likely to fall in line and help more than you ever dreamed they could. (For more about family finances, see: Which Family Financial Sacrifices Are Worth It?)
Thinking like a corporation can be tough! When our kids were little, it was hard to find time to fold laundry much less make complicated strategic plans that took into account the big picture of what our financial goals were and where our money was going. Your execution doesn’t have to be perfect; you can improve things even with intermittent attention to any of these concepts. How about a family jaunt to Baskin Robbins to discuss?
(For more about families, see: The ROI When Your Millennial Kid Lives at Home.)
Kathryn Hauer, a Certified Financial Planner ™, adjunct professor, and financial literacy educator has written numerous articles and several books including the “11-Step, DIY, Comprehensive Financial Plan Workbook” and “Financial Advice for Blue Collar America.” She works to help clients and readers understand and act on complex financial information to keep them and their money safe. She functions as a strong advocate and guiding light for her clients as they move through murky and unfamiliar financial and career worlds. Read more at her website.