The Household Chief Financial Officer

The way to prosperity is to run your household like a company

By Christopher Music
Where does the lack of control start regarding finances begin? Closer to home than you might think!

One of the biggest errors in the field of personal finance is the lack of a position within the household “company” who is ultimately responsible for the economic condition of the group. This is the Household Chief Financial Officer (HCFO).

The household as a group has agreed-upon goals and objectives related to financial matters. These goals can include raising and educating children, maintaining a home, charitable interests, creating retirement income, growing a family business, travelling, and many other worthwhile endeavors. These are goals of the group, and not of any particular individual in the group. However, for these goals to be realized, one person in the group must have the responsibility of ensuring that the economics of the household are managed to those ends.

First, let’s define “economy” (and therefore, “economics”) to clear up the confusion of what the HCFO is doing. According to Webster’s Third New World Dictionary © 2002,

Economy: 1 a) obs.: an art of managing a household.

b) archaic: the management of affairs of a group, community, or establishment with a view to insuring its maintenance and productiveness.

<Greek, oikonomos, steward (from oikos, house + noumos, manager)

Most of the definitions of “economy” and “economics” have to do with the study of production and distribution of goods and services in a particular geographical area.

Notice that definition number 1(a) is obsolete, which could not be further from the truth. The individual is the basic economic unit of a society and he will maintain his own household or merge his finances with a family unit. So, in actual practice, economy is first practiced in the household. If you’ll notice, all of the assets owned in the world are owned by individuals and family units in some form or another.

Definition number 1(b) is archaic, which means that it is no longer in use. Again, the truth is that economy is the hallmark of a well-managed group that is achieving its goals and purposes. This definition is very much in use since the management of the financial matters of a group determines whether it will be maintained and productive.

This definition has been rendered obsolete and archaic by those people who profit from the public having no understanding of its true meaning and purpose. The HCFO must rise above this confusion to operate effectively.

HCFO Standards of Conduct

The HCFO position has certain responsibilities and standards of conduct.
This standard of conduct is summarized in the concept of fiduciary duty.

Fiduciary duty is a concept that is used in business and in trust law--an obligation to act in the best interest of another party. For example, a corporation's board member has a fiduciary duty to the shareholders and a trustee has a fiduciary duty to the beneficiaries of the trust. Thus, the fiduciary is the person who is bound by fiduciary duty.

A fiduciary obligation exists when a fiduciary knowingly accepts the responsibility to act with a special trust, confidence, expertise and discretion on behalf of a client. A fiduciary duty is the highest standard of care in the law. A fiduciary is expected to be extremely loyal to the client, putting the client’s interests before his own. The word is derived from the Latin word fides, meaning faith, and fiducia, meaning trust.

In the context of a household, the HCFO is the fiduciary, and the household as a group is the client. In other words, the HCFO manages the income and assets of the household to best achieve the goals of the group and is held to a high standard of ethics and trust in his activities.

A guiding principle of behavior for a fiduciary is known as the “Prudent Man Rule”. This rule is based on common law which came from a Massachusetts court decision in 1830 – Harvard College v. Armory 9Pick. (26 Mass.) 446, 461 (1830), which directs trustees (fiduciaries) “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”

Using this “prudent man rule” as a guide, a HCFO can determine which expenses would be good investments for the household and which ones would be marginal or a waste of money. For example, investment into education would be prudent while paying for a vacation (at the wrong time) would not be prudent. The HCFO must use good judgment and intelligence in the application of this standard with the goal of increasing the value to the household.

The HCFO is entrusted with the full support and assistance of all of the household members in the execution of his duties. Whoever takes on the responsibility of this position must function as a HCFO, or he must be replaced by someone who can carry out these duties. He has the final word on the allocation of expenses in the household and cannot be overridden, as that would be economically harmful to the household.

But don’t blindly follow the HCFO. Everyone within the household unit must assume some responsibility. If the economic condition is improving, then he is doing his job. However, if not, then corrective actions must be taken.

The HCFO is responsible for the following:

1. The solvency of the household (that income is greater than expenses)
2. That the household is debt-free (with the possible exception of mortgage and business debt)
3. The amount of net worth of the household
4. The timely filing of tax returns and payment of taxes
5. The amount of money saved each month into long-term investments
6. Holding a periodic (i.e. monthly) financial meeting with other household members to review objectives.
7. Implementation of financial plans and programs to assist in the accomplishment of the goals of the household and the competent handling of financial emergencies.
8. The due diligence related to making and monitoring any investments held by the household.

Control of one’s finances starts at home. It is the careful and prudent management of one’s income and expenses so as to bring about prosperity. It can be done.