Your Financial Habits are Dictated by Your Sense of Obligation

The following is adapted from Pass It On, by Roger and Lori Gervais.

People’s financial habits are often dictated most by what they feel a sense of obligation to. When this obligation is targeted in a healthy direction, your family’s vision can be established for generations. For example, when people value financial stewardship, it gives rise to a sense of obligation that we should care for others and not just ourselves.

However, many people function with no obligation. They trust that wealth is meant to be enjoyed, and they live large. From what we’ve seen in our work, and in discussions with colleagues, money is most often frittered away when there’s no sense of obligation to future generations.

Financial behavior is equally problematic when it’s directed by the wrong obligation. Let’s consider a hypothetical example of how this wrong obligation can often play out through the story of Tracy.

The Wrong Obligation

Tracy’s dad was a hard worker, putting in over thirty years as a machinist at the same company. The company — we’ll call it “ABC Inc.” — had rewarded his years of hard work, granting him a pension and company stock.

Tracy grew up hearing her dad praise ABC Inc. ABC Inc. had set him up with a comfortable retirement, thanks to his pension and the generous dividend checks which arrived. When he passed away, Tracy inherited his stock. After years of steady growth, the stock had left her with sizable wealth, and she became as passionate a believer in the reliability of ABC Inc. as her father ever was.

Her father had told her to never sell the ABC stock, but Tracy wouldn’t have sold them anyway. Given how closely she associated the company with her father, selling the stock would have felt like selling a piece of him.

But the ABC stock wasn’t as reliable as Tracy believed. When the financial crisis of 2008 hit, the price for ABC stock plummeted. News articles reported that ABC Inc. had over-extended themselves in credit. They’d become too big, too unwieldy, and were trying to branch out in too many directions.

Say Tracy came into our office at that point — a point at which ABC stock might have finally climbed back in a place where selling would be beneficial. We would urge Tracy to do what would have been the best strategy all along: diversify.

But Tracy says she just can’t do that. ABC Inc. doesn’t just amount to dollars and cents. ABC Inc., to Tracy, is her father. Tracy feels an obligation to a company, for understandable reasons. However, that sense of obligation leads to confusion about the best financial decision to make. In essence, a misdirected obligation can get in the way of making rational decisions based on fundamental data.

The wrong obligation can set you up for bad decision making. Instead of working to care for your future generations, you can easily end up losing the bulk of your estate entirely.

The Healthier Obligation

Let us be clear: you should love and learn from your predecessors. It wasn’t wrong for Tracy to appreciate the past, love her father, and want to honor him with how she handled the wealth he’d given her. Those emotions were entirely appropriate. However, Tracy misstepped when she put all of her focus into a company and attempted to maintain her father’s exact financial strategy, without taking into account how that strategy might need to change to accommodate the changing times. A better way for her to honor his legacy would have been to perpetuate his wise financial stewardship.

We want to suggest that the healthiest obligation you can feel, as a family steward of your wealth, is to future generations. When families direct themselves with this healthy obligation, they are better equipped to build and perpetuate wealth, not mishandle or lose it. These families feel an obligation to pass the wealth onto others, specifically to future generations and through philanthropy.

Warren Buffett is an amazing example of what this looks like practically. Although he’s one of the richest men in the world, he’s lived a life characterized by generosity. His family has seen him give close to 90 billion dollars to charity, and he plans to leave the bulk of his estate to charity as well. His children won’t be hung out to dry.

In a letter he wrote to the Gates Foundation, Buffett wrote, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.” He has raised his kids to live modestly, teaching them that he doesn’t measure his success by his money, but by how many people care about him. That’s values-driven family stewardship.

For more advice on financial habits, you can find Pass It On on Amazon.

Roger and Lori Gervais are proud parents of three wonderful children: Anna, Will, and Jack. Roger and Lori are also the husband-and-wife team behind The Gervais Group, named by Forbes as “Best in State Wealth Advisors” in Wisconsin. Lori, a CERTIFIED FINANCIAL PLANNER™ professional, has been recognized for her commitment to clients and to the profession by Forbes, which named her to its America’s Top Women Advisor List. Roger, a CFA® charterholder, uses his background in engineering to offer clients a unique set of problem-solving skills. Throughout their thirty years of combined experience in the industry, Roger and Lori have made it their mission to simplify the complex world of financial planning.