Hey, let’s go for a ride! Where do you want to go? Nowhere? Ok, we’ll just drive around aimlessly and hope we accidentally end up somewhere interesting. Hop in!
That’s the way most people plan their financial life. They may have a vague idea of where they want to go, but they’re not really sure in which direction to point or how long the trip will take. Then they spend the rest of their lives zigging, zagging, asking directions, and wondering, “Are we there yet?”
If you feel like you’re not getting what you want, or feel confused about money, this could be one reason why. Because if you don’t know what your specific goals are, they obviously can’t be achieved.
If you want something from life, no matter what it is, the fastest way of getting it is to describe what it is you want as specifically as possible, visualize it, understand why it’s important, define the tasks required to achieve it, divide those tasks into manageable steps and follow through. If you don’t do each and every one of these steps, you’ll either never get what you want, or you’ll take longer than necessary to do it. These steps are the roadmap that represents the shortest path from where you are now to where you want to go. And a map is the only thing that keeps you from driving around in circles.
Ok…so where do you want to go? Do you want to be self-employed? Do you want to retire at age 50? Do you want to send your kids to Yale? Do you want to pay off your house? Write a book? Be an actor? What you want from life is a unique and very personal reflection of who you are. Most people never even think about what they really want, much less do anything to make it happen. Oh, sure, when pressed most of us will spit out some canned answer to the question of what we want. “I want to be rich!” “I want to go fishing every day!” “I want to be a Stanford professor!” “I wanna be a rock star!” But that’s about as far as it goes. One major reason is probably because a dream that’s not acted on can still remain a dream. In other words, if you never attempt to make your dreams into reality, you can’t fail. Of course, you can’t succeed either, but for most people, avoiding failure is more important than not getting what they want. Pain avoidance is human nature, which is a shame since the pain of repeated failure is incredibly insignificant when measured against the pleasure of ultimate victory.
But let’s assume that we’re sufficiently self-actualized to risk failure and we’re ready to attempt to turn a vague image, which is another name for a dream, into something we actually intend to achieve, which is another name for a goal. Let’s pick something, follow the steps and see what happens.
Let’s become rock stars. Time to describe, visualize, understand, define tasks, create a list of specific steps and follow through.
First, we describe what it means to be a rock star. “Rock” obviously implies what kind of music we play, but what’s a “star?” Our thesaurus tells us that synonyms for “star” include dominant, main, major, outstanding, predominant, preeminent and principal. And from our dictionary we find several fitting definitions: a highly publicized theatrical or motion-picture performer: an outstandingly talented performer <a track star> : a person who is preeminent in a particular field.
Cool. That’s what Webster says, but let’s see exactly what we mean when we use the words “rock star” by visualizing what a rock star looks like in our mind’s eye. There we are on stage, in tight leather pants, belting out the blues. Now we’re sitting on a bar stool in our private studio, guitar in hand, putting the finishing touches on our latest creation. And there we are getting out of our limousine and being mobbed by adoring fans.
Now we’ve got a clear picture of what we mean by rock star. Let’s use that to see if we can understand why this whole thing is so important. In other words, what are we really after? Rock stars are rich. Is it the security that comes with money that we’re after? Well, security is certainly appealing, of course, but when we honestly assess it, that’s the icing, not the cake. Rock stars create original works of art. Is it artistic expression that we yearn for? Hmm… that rings true. Yes, definitely part of what makes being a rock star so appealing. Of course, we could be creative without being a star, so there must be something else. What about fame? Eureka! This is definitely the core of our desire; the crux of the biscuit. When we visualize being a rock star, the clearest and most appealing image we have is the throngs of people pressing their eager faces against the windows of our limo, desperate to catch a glimpse of us. So what we really want is the immediate recognition and respect that comes with fame. We want to be the center of attention for a change. Yep, that’s it. Anything else? Well, since this is our personal, private visualization, let’s come completely clean: a few dozen groupies never hurt.
Fine. Now we know exactly what we want, what it looks like and more important, we know exactly why we want it. We know what spiritual need is being met by accomplishing our goal; the need for recognition. Now that we know that, we might want to figure out why that spiritual need is so important for us, or we might not. Either way, we’re ready to take the next step.
We’ve described what we want, we’ve visualized it and we understand why this goal is so important. It’s time to define the steps to make it happen. Step one: best we learn to play a guitar and sing. Step two: we need to figure out how one goes about cutting an album and do it. Step three: we need to figure out how we’re going to get noticed so that we can get our big break.
Those are the broad strokes. Now we’ve got to make an itemized list of specific tasks to accomplish these steps. Since this isn’t my goal, I’m not sure what those steps might be, but maybe it would include things like signing up for guitar lessons, singing lessons, reading a book or two about how other people have done it, finding other musicians to hang out and jam with, forming a band, looking up theatrical agents, playing in the right night clubs, contacting a recording studio, entering a battle of the bands, getting our demo into the hands of a major record label, etc., etc., etc.
As we list each specific task, we record exactly by what date we’ll have it done. As we proceed, we periodically review our progress, add steps if necessary and adjust our deadlines to conform to an ever-changing reality.
Now all that’s left is to follow through. Easy to say, tough to do. In fact, simply showing up, persevering, is without a doubt the least understood component of success.
I’ve been successful at two careers in my life: stock brokerage and TV news. While these careers have almost nothing in common, interestingly enough both took around five years of failure, of daily rejection, before anything appeared that even slightly resembled success. In both careers, during these five-year periods I watched the vast majority of my peers quit and go elsewhere. I’m not suggesting that success always takes five years, nor am I saying that if something isn’t working out you should stick to it regardless. I’m simply saying that nothing worth having is easy to obtain, and complete commitment is the only way of obtaining it, at least in my experience. I’ll bet you won’t find a rock star that argues this point.
On the off chance that being a rock star isn’t your primary goal, maybe we should include a quick example of something that may relate more closely to the subject at hand. Say, retiring early.
First we’ve got to describe exactly what retiring means and then what early means. I’ve often mentioned to my wife that I’d like to retire sometime soon, and she just laughs. She laughs because when I use the word retire she visualizes someone sitting on the front porch in a rocking chair. And she knows that I’m definitely off my rocker. I’m more like a shark: if I’m not moving, it can only be because I’m dead. Therefore she knows there’s no way I’m retiring, at least not anytime soon. But that’s not the vision of retiring that I had in mind. I’m talking about having the ability to do things other than face deadlines. If I want to work, which I undoubtedly will, fine. But I want to have enough so that regular, intense work is optional. So my vision of retirement is actually having the financial security that affords us the freedom to do what we want, when we want. And if what we want to do is nothing, we can. As to understanding why I want to accomplish this, the spiritual goal I’m striving for is security: to know that if push comes to shove, I’m going to be ok. And just as important, I need to know that if something should happen to me, Gina will be ok. Finally, to be brutally honest, I kind of like the ego-gratification that I’d get when someone asks me what I do and I respond, “Whatever I like.” It’s that recognition and respect thing.
Now I understand why my goal is important to me. I’ve described and visualized, but I’m not done yet. Because I still haven’t defined how much money I’ll need to meet my definition of retiring. To do that, I’ll have to know the approximate amount of money I’ll be spending when I’m retired. Once I know that I can extrapolate how much principal will be required to throw off that much income. I can subtract what I already have from what I need, see what the shortfall is and then figure out how to fill that gap with monthly contributions to savings. When I’ve done all this, I’ll know exactly how much time it’s going to take. Only then can I know whether my goal of retiring early is possible, and if so, what early will look like.
Before we can plug in some numbers, we first have to get specific about what our retired life will look like. Gina and I talk it over and think out loud about what we’d do if we had more free time. We both love traveling, so we’ll definitely be doing some of that. We also like boating, motorcycle riding and dancing in our favorite honky-tonks. As we think it through together, we come to grips with the kind of people we are. We realize that we don’t require expensive toys, nor do we need to do our traveling in a limo or private jet. But we’re not hitchhikers or panhandlers either, and the occasionally big splurge is something we both enjoy. We think this kind of stuff through thoroughly, estimate what we’d like to spend having fun every month and combine that with more mundane expenses, like keeping the lights on and eating. We arrive at a monthly income requirement of $6,000, which we think will do the job once our mortgage is paid off. We also factor in that we could be earning additional money by things like the occasional public speaking engagement or royalty check. But since these things are uncertain, they’re icing, not cake.
So now we’ve described what we want, visualized what it’s going to look like, and understand why we want to accomplish this goal. Time to build a road map by defining the steps to get there.
The steps to saving for an early retirement are pretty basic. Actually, there’s only one: we need to know how much principal we’ll need to generate an income of $6,000 a month.
In days gone by, this would have been the start of a daunting task. On the surface it’s no biggie: if I need $6,000 a month, that’s $72,000 a year. And if I assume that I can earn 7% on my money, all I have to do is divide 72,000 by 7% and I arrive at $1,028,571. So, all things being equal, I need about a million bucks to spend $72,000 every year without putting a dent in the principal. But all things aren’t equal. Because we also have to factor in things like social security, which we won’t be getting until our mid-sixties. We have money in retirement plans that we can’t touch without penalty until we turn 59 ½. There’s inflation to consider. Income taxes. We don’t know how long we’re going to live. And we don’t necessarily need to die with a million dollars in the bank, which means that we could ultimately choose at some point to spend our principal. Add up all the variables and you have trouble adding up all the variables. In the days before technology, the resulting confusion might have sent us to a securities salesman disguised as a financial planner.
These days, however, we can quickly find free and accurate help to do all this number crunching for us. There are plenty of calculators online; let’s use the one I found at the CNN/Money magazine website (http://cgi.money.cnn.com).
In the first section, the calculator asks me to input the following information: both of our current ages (I’m 47, but I’m way too smart to tell you how old Gina is), our desired retirement ages (I said 55 for me, which is eight years from now,) our life expectancies (I said 85), our current income (none of your beeswax), what kind of annual raises we expect (I said 3%), and our desired income at retirement ($72,000).
The next section of the calculator starts by telling me what we can expect from Social Security, but allows me to make adjustments if I think it’s wrong. (Remember, I can go to ssa.gov for projections, or even request a personal benefits statement if I choose.) Then it asks if I’ve got other sources for retirement income, like maybe a pension plan. (No such luck.) On to the next section, which concerns itself with what I already have in savings.
In this section of the calculator I input the current balances in my 401(k), how much I’m contributing as a percentage of my annual pay and any company match I’m getting. It also asks about any IRAs, SEPs or other retirement accounts. Then it asks about our non-retirement savings accounts: what we have now and how much we’re adding to them every year. Finally, it wants to know what tax bracket we’re in on both the federal and state level.
The next question our calculator asks is what type of investing we’re doing: very conservative, conservative, passive, balanced, active, aggressive or very aggressive. It describes what it means for each category by offering an investment mix. We don’t really fit exactly into any of the seven possible categories, but I choose “active.”
All the information required was readily available, and filling in the blanks only took a few minutes; easily accomplished during one commercial break. Now all that’s left is the results. A click of a mouse and there it is: I’ll need to have a total of $1,236,003.00 to retire in eight years, and given what I’ve told the calculator about what I already have in savings, what I’m adding every year and how much the whole enchilada is earning, I have a 71% chance of making it.
The calculator also provides me with a detailed breakdown of the income I’ll be getting, including Social Security, and tells me how much we’ll have left over when we die. It allows me to make adjustments: for example, I can tell it to increase my annual savings contributions so that my probability of success goes from 71% to 90%. (This would require my saving an additional two grand a month.) It factors in inflation. So we’ve arrived at a decent, but not perfect, conclusion.
Why isn’t the conclusion perfect? Because there’s no calculator that can know me personally or ask every possible question that could potentially influence the outcome. For example, this model assumes I’ll only be earning about three percent on my savings: realistic perhaps, but I think by using rental real estate or other slightly less conservative investments I can do better. The calculator also doesn’t know that I might be earning some additional income during my retirement years, nor does it consider that I’m willing to make lifestyle adjustments to counteract part of the inflation it’s assuming. It didn’t ask if I’d be inheriting. It can’t know how long I’ll actually live, nor did it allow me to make adjustments to the amount we want to have left over when we die. (Since we don’t have any kids, I don’t have a compelling desire to die with half a million bucks, which is how much it said we’d have.) It didn’t ask whether I’d be willing to sell my home at some point and move to something smaller, thus adding to savings. There’s no way for any calculator, or its human counterpart, to factor in every variable, account for every possibility or know my personal capabilities. So they can only be used as a starting point, albeit a solid one.
Bottom line? This calculator was a huge help in defining the steps (in other words, telling us how much we’ll have to save) to achieve our goal of retirement when I turn 55. If I want to get more detailed, and I probably would if this were a true goal for me, I could do additional things like try other calculators or fiddle around with these results to make them more accurately reflect our personal situation.
The result of this exercise, however, is that we now have a much clearer picture of what our goal is, why we have it and what we’ll need to do to accomplish it. So our odds of achieving this goal just went up radically. As for the next step in the process, dividing the steps into manageable tasks, that’s simple enough. Once I’ve fine-tuned what we need, we’ll make sure we put aside the amount required every month to succeed. And we’ll follow through, which will mean putting aside that amount and forgoing spending money, if we can help it, on anything that might keep us doing that. And unless our goal changes, we’ll do it consistently for the next eight years. We’ll periodically review our progress, say every four months. We’ll make adjustments if necessary and do whatever it takes to keep on keeping on. And when we’re tempted to do something that might screw up the odds of reaching our goal, we’ll stay on track by calling to mind our well-defined, crystal-clear vision of what we think is most important.
I hope these examples demonstrate the importance of goal setting as well as the process of doing it. The point is that if you want to accomplish something, take it out of your dreams and make it a goal by planning it out in detail and writing it down. Because dreams only come true by accident; goals are achieved by design. Accept the fact that failure is always a possibility and goals are dynamic; they often change. Also accept the fact that, as in the preceding example, most of the time you can’t factor in every conceivable variable. You can radically reduce your odds of failing by first discovering what it is you’re actually attempting to achieve. For example, when we defined and visualized being a rock star, we discovered what we really wanted was recognition, not a limousine. Well, there are other ways of gaining recognition than being a rock star. Like writing a book, for example, or starring in a community play. Granted, this isn’t the same level of recognition, but maybe when we weigh the probability of success and the time and effort required, it’s a spiritual compromise we can live with. How we’ll survive without groupies, however, I haven’t the foggiest.
But as you go through the organizational process of becoming a 60-Minute Money Manager, remember that what you’re doing is enhancing your ability to get where you want to go. Goals are destinations. And without destinations, there’s nothing for a 60-Minute Money Manager to manage. So go places; set some goals.