This is actually a branch off of my other topic, "The power 19 cheat sheet." In my game, there is a gamist agenda, as well as some crunch. However, I wanted to promote story in my game, and this was something I came up with to address that.

Here's the premise...

Earlier in my design, I had come up with a mechanic called "Destinies."  The way it worked was you would invest some character XP in the destiny.  You would then write a short background to the destiny (Evil Dude killed my Loved Person) how it affects your character's values (I will protect people at any cost to myself) and how you believe your destiny may be fulfilled (I avenge my Loved Person's death by killing Evil Dude.)  After your destiny *was* fulfilled, you got your XP back with interest, depending on how long it took you to fulfill your destiny and how hard it was. I wonder if I should revisit this mechanic or mechanics like it? Hmmm...

I don´t like the "time" part (the earlier you beat those, the better). Sounds like a computer game.

Make XP not rewards where you get better in combat. Make them more general. If, however, you make them general and 90% of your rules are about combat, suggesting to players that combat is what your game is about, they will spend those XP for combat.

Chop
Maneuver
Prerequisite: Weapon Skill 4
The fighter makes a direct attack to a soft spot and quickly reverses direction upon contact, maximizing damage. When performing Chop, you make an attack as normal. If you succeed, you deal your maximum damage, automatically giving you the highest result on every die you'd normally roll.

Unmemorable
Stance
Prerequisite: Disguise Skill 10
You are not a memorable person, regardless of being seen and interacted with. Anytime somebody attempts to recognize you while you are in unmemorable stance, roll a SC Disguise -5 vs. Intuition. If you succeed, they will not recognize you if they've met you before. If they haven't met you before, they will not remember you in the future, either. If you or somebody else says your name, and the subject knows your name, they will recognize you.

Fey Acumen
Prerequisite: Survival 5
You have studied the nature of Fey, and are familiar with how to deal with them. You gain a +2 bonus to Speechcraft skills when dealing with Fey and a +2 bonus to Willpower against spells cast by Fey. In addition, your Speechcraft skills are treated as being trained to half your level when dealing with Fey, if it is not already trained higher.

To clarify a few things, Maneuvers are attacks with an additional cost of fatiguing your character. Stances are just a posture you are in, and you can only be in one "stance" at a time, since they are all rather powerful.

Dave,
  I know from experience playing other games that both work. You can link the XPs directly there is a little more paperwork, but it is not too bad and makes a lot of sense to a lot of players
  Or you can have a pool of XPs, and let people buy what they want. It can make sense and is a little easier on the paperwork.
  The question is which one of these (or a third option for all I know) makes more sense for the kinds of stories you want to tell?
  To put it in perspective, if you make a system where there are Fighty XPs and Talky XPs, then you are telling stories where Specialists excel and generalist will flounder. Whereas, in a pooled XP, you are not pimping one behavior over the other. The character can act however they want (as long as it gets them XPs) and evolve however they want.

  I think the idea that you invest XPs in a Destiny and then get a payoff works, as long as the criteria for the payoff are well defined (no GM fiat) and not limited by real/game time.

  Your Rep/Connection rules look serviceable. I used a Rep meter in LoL, but I left connections to RP. I did use a Destiny mechanic, but it relied heavily on Social Contract. Basically, you got a Destiny Point whenever you helped move the story, and you could trade it in for what you care about (subplot, plot twist, quest, loot, etc.). The idea was to give the players what they want from the game. Instead of telling them.

  Good luck with your design man!

The short answer to the question is that limiting xp expenditure has different effects compared to leaving it free. If the flow of the game is at all like I imagine it to be, then the crux of the issue is whether you want to make spending xp a feature of play - I usually try to do this in my own fantasy adventure gaming, as I find it entertaining when the characters are limited pretty strictly to gaining only the sort of advancement that makes sense in the fiction. Then again, I often have to back down on this in practice when the focus of the game really and truly is not in the growth story of the character, but on something he actually has to be doing instead of seeking mentors to perfect his kung-fu.

However, if I were in your stead, I wouldn't necessarily obsess too much over the supposed problem of the game focusing on combat - the important thing is to recognize if combat has some special meaning or role in the structure of your game, and deal with it accordingly. For example, if all the significant challenges in your game are combat challenges, then combat is going to be central, and that's pretty much that. So first figure out and put to words what sort of challenges the game will include - those are the sort the players will want to conquer by improving their character.

I also want to say that I like what I'm seeing from your game - there are some smart ideas in there. This reminds me very much of my own grand fantasy game, the one I abandoned when Clinton R. Nixon published his The Shadow of Yesterday - I was approaching the design with a similar aesthetic, then. What I'm interested in, however, are the large arcs, because those are what determine the overall usability, and above all, relevance of the individual mechanics. When they are used and why are the questions, and leaving the answers on the level of "GM invokes individual mechanics when the fiction suggests they might be applicable" leads to a lack of focus.

I'm very tired so I may be missing the point, but I wanted to touch on this since you've been so helpful on my queries. 

I really like the second model of XP investment.  It's clear from your suggestions and what I'm seeing here that you think well outside the box and you're an innovator.  The investment concept is nice and, more importantly, your milestone concept makes it a more meaningful element of the game.  Probably the most common issue I see in games of any kind is the flagrant disregard for background.  I don't mean players who don't care about creating one.  I mean GMs that don't acknowledge them when some players work very hard on them.  In a way, your Destiny idea reconciles this by putting special emphasis on backgrounds and their implementation in the main storyline. 

Your question, though, about how to handle the XP expenditure really needs to be redirected to you.  If characters spend XP in a limited fashion, then the game directs them in their development.  If it is wide open like a wad of cash at the toy store, then characters will develop entirely by the whims of the players.  Whether this is good or bad depends entirely on what you're trying to accomplish here, so the question is better aimed at you as the designer - is it sufficient to simply award the XP generically and have it spent however the player chooses (causing the character to develp in unpredictable ways), or do you feel your game needs sharper definition in character advancement?  I'm not sure that either method is better when you look at them alone.  It comes down to your overall game and where you want it to go, how you want characters to be defined (or refined) through advancement and so forth.  Any way you go, your destiny idea, the second incarnation, is a keeper.

Again, I may be way off base here because my brain is in shutdown mode.  If so, please ignore me. 

  Your Rep/Connection rules look serviceable. I used a Rep meter in LoL, but I left connections to RP. I did use a Destiny mechanic, but it relied heavily on Social Contract. Basically, you got a Destiny Point whenever you helped move the story, and you could trade it in for what you care about (subplot, plot twist, quest, loot, etc.). The idea was to give the players what they want from the game. Instead of telling them.

Again, I´d like to direct you to TSoY, where mechanically, something helping you in social conflict works exactly the same as something helping you in a swordfight; a friendly letter from the local authority gives +1 in social, an especially well-made sword in physical conflict.

See http://files.crngames.com/cc/tsoy/book1--rulebook.html#weapons-and-armor

Dave,
  I hope you didn't take that comment the wrong way. I meant that it was not particularly new or overly effective for your goals (neither of which you really claimed), nor were they ineffective or broken. CP2020 does rep very similar to the way you describe. The only problem I have with it (and it is minor) is that it is very open to GM fiat. Meaning I have a rep of "badass +3." Does that give me +3 to intimidate? Well, it depends on the situation, right? And as soon as that is the answer, then it becomes questionable if the bonus is worth achieving.
  If you look at HQ, you will see that is uses a similar system to your rep system, but for every conflict. It is very successful, because there is no point where the GM can say, that trait doesn't apply. The Player narrates their actions, picks the traits that apply and gets their bonus. Now, every player at the able has the right to call BS, but the remedy is not to preclude the bonus, the player can add more narration or remove the trait. And the fact if the trait is included is based on whether the player narrated it into play, not whether NPC X would be intimidated by the Badass trait or not.
  And this is where role playing and role playing rules get into a gray area. "subject to interpretation" I feel that in order for them to work, the player and GM both have to know what they can expect from a mechanic. So, I tag a player with a rep of "Smartass +1" what does that mean in play? Does that mean there is a +1 chance that people will know he is a smartass before the characters meet? Does that mean they get +1 to charm a peasant? -1 to charm a Noble?
  UI guess what I am saying is, if you want to encourage role play over more codified behavior (kill him and take his stuff), you need to be sure that the other paths are just as rewarding, fun and viable. A perfect example was I made a diplomat in Exalted. He had god-like levels of charm, appearance, manipulation and the skills and charms to go with them. But in combat (and there was a LOT of combat) the ST balked at the idea of my character being able to intimidate or charm an NPC. Needless to say, this was not very fun and discouraged me from looking for non-combat solutions to problems, right? So, how will your game address these kinds of situations?

Actually, there isn´t a problem PER SE in making rewards exclusive to one area. What may hurt the game is if one of these areas always or mostly trumps the others.

What I´m saying is: mostly, when social solutions fail, combat is an option. Mostly, when combat fails, social isn´t an option for achieving the same goals. So, combat trumps social; rewards for combat effectivity trump rewards for social effectivity.

Two solutions: 1., make both equivalent in power. Make sure everything achievable by combat is achievable by social means et v.v. or, alternatively, make sure that there are some ares the former, some the latter may never help you in and make sure both aeras are important. That´s approximately what dindener was proposing and I agree.

2., make the mightier solution more costly. Ie., whoever escalates to violence ALWAYS has to pay a price. That´s a pretty sweet, but harder to implement solution. I think DitV works like this.

I just reread my last post and I wanted to clarify something. 

I find it interesting that you say they are "serviceable." Mostly, because this is how they worked in the two games I remember seeing them in (A Game of Thrones RPG and Battlelords of the 23rd Century.)

Reading your responses has fairly convinced me that I should just leave it the way it is.  A player who wants to be better equipped for story conflict will gear their character that way, those who aren't interested in that will stay away from it.

A perfect example was I made a diplomat in Exalted. He had god-like levels of charm, appearance, manipulation and the skills and charms to go with them. But in combat (and there was a LOT of combat) the ST balked at the idea of my character being able to intimidate or charm an NPC. Needless to say, this was not very fun and discouraged me from looking for non-combat solutions to problems, right? So, how will your game address these kinds of situations?

Again, I may be way off base here because my brain is in shutdown mode.  If so, please ignore me.