One Magical Idea to Rule Them All
Tools you'll need:
Paper
Pen
Some degree of imagination (Don't worry. It's not so much "Walt Disney" as "that cloud looks like Uncle Tony.")
Virtually every financial book starts with the same tired move: asking you to write out your goals. While there's nothing wrong with this strategy for financial planning, seeing it over and over starts to feel like hearing the same old pickup lines:
"Hey, baby, are those some well-thought-out financial goals in your pocket, or are you just happy to see me?"
"Is it hot in here, or is it just your thirty-year financial plan?"
"I like your money goals. They'd look great in a pile on my bedroom floor."
Here's the problem with goal setting: Many people mess up their plans from the beginning. They ask the wrong questions, and that makes the whole process far more difficult than it needs to be.
Back when Joe was a financial planner, it felt like everyone wanted to know the answers to the following completely irrelevant questions, long before they got into the important stuff:
1. How am I doing compared to everyone I work with/live near/compete with in my fantasy baseball league/watch on television/etc.?
If you're not doing better than a random sampling of people who don't know they are your nemeses, then how can you win? But who cares? #Spoiler: when you die, we're fairly certain there aren't a bunch of tickets you take over to the Skee-Ball prize counter to cash in after you beat everyone else at the "I accumulated money" game.
Okay, we can't guarantee that this doesn't happen. (Truthfully, we haven't yet been to heaven, but we have been to Vermont, and people who live there never tire of telling you how close to heaven it is-and more importantly, there's no place to claim your "I made more money than Bob from accounting" prize anywhere in Vermont.)
What we can tell you is that there are significant benefits to accumulating "enough" and then pausing the accumulation game to spend money on the things that make you happy today. People without goals either spend everything or save far too much, depending on which game they're inclined to play. People with goals are able to balance having fun today-which brings joy to your life right now-with making sure they'll have enough left for fun tomorrow.
2. How do I find the "best" investments?
When you chase investments in the quixotic quest for the "best," you end up on a merry-go-round of options. The problem isn't that people lie to you about which investments are "best," although chasing after an elusive beast known as "best" will make you think they are lying.
The real issue is that it's impossible to define the word "best." What's "best" changes as you pursue your goals. Take the following chart we've reproduced here, which may be giving you flashbacks to high school chemistry class. (No, it's not actually the periodic table. We wanted to put a joke here about it, but then we realized we're not quite in our element. #BaDumTss.) It is a list of different types of investments and how they compare in different years. The asset classes are listed with the best-performing ones at the top and the worst-performing at the bottom.
Here's the interesting thing: what's "best" has changed a lot over time, and what's "best" in one year isn't necessarily what's "best" in the next. There are many factors at work here, but without needing a PhD in this stuff, let's just say that "the best investment is in the eye of the beholder."
So how do we know what's "best"?
Joe grew up in farm country, so he's going to hit you with a homegrown metaphor: investments are like crops. There is always a specific growing season. You can't plant corn in July and harvest it in August. Why? The corn wouldn't be ready yet. Also, if-after a late September planting-you left the stalks to grow to full height, the Michigan winter would kill your corn before it matured. Farmers plant corn in the spring and harvest it in late summer because that strategy has proven to work.
Investments also have growing seasons. For instance, stocks have a pretty long one. If you invest in stocks and want your money sooner than ten years from now, it's like pulling corn out right after you planted it. On the other side, there are investments with short growing seasons. Investing in a guaranteed fund for a far-off future date is like planting quick-growing radishes and expecting the harvest to be there for your grandchildren. It ain't gonna happen. You'd almost be better off planting dirt. Again: "best" depends on what you need. The best investment is the one that meets your goal.
Which brings us back to goal setting. While we find these other approaches fascinating, all your technical problems are solved by the simple act of setting goals-or, if you want us to turn up the "nerd meter": you need to determine your timeframe and return needs so you can predict which type of investment is best for your situation. Once we know that a goal is fifteen years away, we can easily find "crops" to plant for that "season."
Knowing your goals is the most effective way to research, because you're going deep only with those investments that matter to your goals. You're more likely to learn and retain information if you're going to use it immediately, and goal setting is the way to achieve your mission.
But, as we've already said, we won't start with the anemic directive to write down your goals-because everyone else does. No, there's a bigger, more helpful approach that few people implement, but it makes a world of difference. Ready for the amazing first-chapter wow that's going to rock the rest of this book? Brace yourselves:
Timeline Your Goals
Joe: I know, right? Thank you. I loved it, too, but Emily wasn't 100 percent on board at first because she didn't know where the hell I was going with this whole timeline thing. However, once I explained how absolutely magical this concept was, she agreed: this is clearly the first of many reasons this will be the best book you've ever read about money, if not the greatest work of English prose ever put to paper. Pulitzer committee, we await your call.
So what does it mean to "timeline your goals," and why does it rock?
Excellent question.
You make far better decisions when you (1) take goal setting seriously (even though it's clichŽ), and (2) play your goals off one another. Here's how it works:
1. Take out a piece of paper, and draw a line like this across it.
2. Then draw yourself (or you and your partner/spouse, or you and your pets, or whoever you are navigating this bizarre game called life with) on the far left.
3. Now think about your first goal. Maybe that's retirement. Place that as a point on your line.
4. Place ages below everything you've drawn so far.
5. Fill in other goals.
6. Sit back and plan.
Have you ever wondered how your goals intersect with one another? Don't worry if your answer is "Um, intersect?" For instance, if college overlaps for family members-which Joe experienced when his twins both started college at the same time-you can count on lots of stress. Knowing ahead of time how you'll feel in these crunch periods is also a key to figuring out how you'll cope with them.
As you peer at our examples, I'm sure you can already spot plenty of potential issues that you'll need to address. First, as soon as Emily Jr. finishes college, there's only one year to prep for Joe2's school. That could be a problem if you don't plan ahead. Plus, there's then only one year after Joe2 graduates (if he spends only four years in college) to get your butts retired.
From the Financial-Planning Trenches
Joe recalls, "I've been in some meetings with clients, and while drawing out this timeline, I was the first to notice that a kid's college was going to fall right in the middle of Mom's retirement celebration. Deal breaker? Not always. Important to know ahead of time? Absolutely."
Timelining your goals makes weighing your options easier because you can visualize them. Without a visual reference, most of us simply look at whatever major financial tollbooth is next on the road of life. It's easy to feel like your kids' college just snuck up on you if you were busy looking no further than the last item in line.
Here is where we apply some exciting math-two words we don't often get to celebrate together. Every goal comes down to a simple equation:
A savings B return = C goal
Let's take a house addition as an example. You know you need to start with a budget for your kick-ass sunroom with a built-in climbing wall. Even though you're years out from being ready to hire a contractor, figure out how much you need to save between now and then.
You might be tempted to ask if you can afford your addition. But let's save that question for later. For now, you're dreaming big and decide that $20,000 will be enough to fund the room.
Now repeat this process for the education goals. Let's say you haven't started saving for college. How much of the kids' college expenses do you wish to pay? Pick a few schools and find current pricing. Let's say you need $35,000 per year 4 years per child, if you want to pay for the whole shebang-little buggers should be grateful-then factor in that the price of higher education is increasing by about 7 percent per year.
Finally, calculate how much money you'll need at retirement to make that big dream come true. Maybe $2.5 million is going to do the trick, and you've already put aside $350,000, you good little saver, you.
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