I was asked to update thoughts on family legal structuring. Before jumping into that topic, I want to define effective wealth.

If you remember one thing from this post…

Your effective wealth is most closely linked to your spending, not your balance sheet.

Consider US$1,000,000. Depending on where you live, this money could support:

• a CEO for a year
• a family for a decade
• a village forever

The first thing to understand is your core cost of living. It’s going to contain:

• Housing / Property Taxes / Insurance / Maintenance
• Groceries
• Income Tax
• Health Care & Dental
• Utilities / Mobile / IT
• Transport

My family’s total approaches $100,000, which is a big number. However, on a per person basis we’re under $20,000, which is less than I’ve been able to live on my own.

Next comes discretionary spending (mine in descending order):

• School Fees & Childcare
• Gifting
• Club Fees, Subscriptions & Kids Activities
• Date Nights
• Cleaning

Before parenthood, I missed the step change in expenditure, and associated wealth effect, of kids. Note that kids increase human capital, are sources of love and have tremendous option value!

Finally comes luxury spending – travel and vacations. With five in my household, luxury spending has been on a rapid downward trend since my second child was born.

Pulling all of that together, you’ll be able to consider your financial wealth relative to your spending.

• Individual wealth => 5 to 10 years cost of living
• Generational wealth => 10 to 25 years cost of living
• Multi-generational wealth => 25 to 40 years cost of living
• Surplus (excess?) wealth => beyond 40 years cost of living

The appropriate legal structure changes as your family wealth changes.

To understand effective diversification, express your asset allocation relative to your spending. Consider these categories in years spending:

• Family home
• Business investments
• Real estate investments
• Retirement accounts
• Education accounts
• Taxable investment accounts
• Cash equivalents
• Non-yielding luxury assets (art, jewelry, vacation homes)
• Depreciable assets (boats, RVs, vehicles)

Also write out your sources of income and make your cash flow concentration visible.

Looking at asset, income and cash flow concentration should make your key financial risks more obvious.

Be aware of the human tendency to look away from things that make us uncomfortable.

Micromanaging the “little” will make you miserable – remember to focus on the big things.

Change slowly.