When I talk to people starting on their financial journey, many people don’t know how to start or where to go. The problem generally is there’s no defined goal. The more undefined the goal is, the less it’s able to be pursued. For instance, if someone says “I want to be rich”…how much is considered “rich”? If someone says “I want to make working optional”, how much does it take? When do you want to achieve it by? If someone says, “I want to learn how to invest”, to what end? How much risk/return?
If I use running as an example, this is like saying “I want to be able to run far” or “I want to be able to run fast”. How far? How fast? The more defined the goal is, the better to lay the path to getting there. For instance, “I want to run a marathon” is starting to define it since the length of a marathon is set. “I want to run a marathon in under 4 hrs” is even better. “I want to run a marathon in under 4 hrs within the next 2 years” is better still.
In finance, a goal like “I want to pay off my student loans in 5 years” is good, since the amount of loans and length of time are both quantifiable, at which point you can calculate how much you need to pay per month. However while debt goals are good, it misses the bigger finance picture. What I recommend is to always set a net worth goal within a time frame. For instance, “I want to have a net worth of $500K with no debt in 10 years” is a much better goal than just addressing the debt portion.
Personal finance goals really just comes down to one number, the net worth, and how much time it takes to achieve that. Everything else is just a methodology or strategy to get there. It forces you to define what “rich” means or what “financial freedom” means. Money is a tool, an exchange factor, to get to your goal. It should never be the goal itself.
I need to repeat that again - money should never be the goal itself. If it is, I guarantee you will never have “enough.” You need to set what “enough” is as a goal, the timeframe to achieve it, and the steps needed to get there.
For instance, let’s assume 3 scenarios of a 25 year old making $150K/year
- If the goal is to be a billionaire by age 40 (1 billion dollars in net worth). Then this person needs to quit his job immediately, find a startup in hopes to growing it and going public.
- If the goal is to be a millionaire by age 40, (1 million in net worth). This person can just keep his job and exercise some basic financial principles, such as saving a certain amount every year.
- If the goal is to have 3 million in net worth by age 40, then just doing the basics may not get him there. He should find ways of earning more income, such as side-gigs and do more study on investments/finance.
At the beginning of 2013, I experienced my first burnout from working. I decided that I needed a path out. This was my goal: I wanted to make working optional by end of 2023. In my head, it was a 10 year goal (but in reality it was 11 years, since 2013 is also counted). In news stories, I hear about people who “retired” in their 30s with something like $300K or $500K saved up. I personally think that’s way too low as you just never know what life may bring. My goal was $5 million by end of 2023.
Working backwards, I estimated a reasonable 7% return on assets with additional $200K invested per year. I don’t remember exactly how much I had to start but I had saved up quite a bit before the goal, maybe around $750K. Now here comes the difficulty:
- My income at the time did not support investing $200K per year (I still need expenses to live on and Uncle Sam is going to want its cut).
- Even if I can achieve #1, the numbers will only land me in $3 million range, not $5M
So of course, something had to give. For instance, if I can achieve a 10% return on assets, it would work, or get to $215K per year in new investments, that would work as well. Nothing like setting a goal that’s possible but just seems out of reach for motivation.
This goal literally defined the last decade of my life. I scrimped and saved because I wanted every dollar to go into investments. There wasn’t much room there since I was generally frugal already. However, a big portion of expenses was taxes, so I studied taxes. I needed to increase income, so I co-founded an urgent care. I sold out of that, so I got a real estate agent license and worked in brokerage. When that didn’t work out, I started doing another side-gig. I also needed to try and increase my return on investment so I delved into studying investing.
I hit my goal early by 2.5 years, but I can’t take credit for that. It just so happens that the last decade was the greatest bull market in United States history. So no doubt that helped. So what’s my next financial goal? I really don’t have one. I had defined many years ago that $5M was “enough”. If I set another goal, then I’m just chasing money. Since I do love investing, I will continue to do that, and my net worth will likely continue to grow. But I don’t have any defined financial goal in mind.
If you do not like finance/investing, then your goal should be lower. Say you need $2M at age 65. Use 6% as the annual return on assets, and calculate out how much you need to save/invest to get there.
If you are a go-getter, willing to put in the work, both in terms of financial knowledge and pursuing additional income, then your goal can be higher.
This is just my personal story on setting a financial goal and strategizing to get there. But my point is, there needs to be some defined goal to work towards. What you don’t want is to throw money into a 401K thinking that’s enough, but finding out at 60 years old that it won’t support the retirement lifestyle you had imagined.
