Spending Policy

A spending policy answers a deceptively simple question: how much can we take out without gradually consuming the portfolio? It functions as the bridge between investment returns and the family's real-world cash needs — covering everything from living distributions and family office operating costs to charitable giving. Without a defined policy, spending decisions tend to be reactive, made in isolation from portfolio conditions, which can erode wealth across generations in ways that are invisible until significant damage is done.

Families commonly express a spending policy as a percentage of the portfolio's value, either calculated on a point-in-time basis or smoothed over a rolling multi-year average to reduce the impact of short-term market swings. Some families tie the policy directly to portfolio income — dividends, interest, and distributions — and commit to spending no more than what the portfolio generates organically. The right approach depends on the family's broader goals, tax situation, and liquidity profile, which is why attorneys and CPAs are typically involved in structuring it.

A hypothetical family operating under an endowment model philosophy might adopt a smoothed-average spending policy specifically to avoid being forced to sell illiquid private fund interests during a market downturn just to meet distributions. The spending policy is closely connected to liquidity management and is often codified inside the investment policy statement so that all family members and advisors operate from the same rule rather than negotiating it anew each year.