Yesterday, Pete @ My Financial Awareness posted an excellent article titled “Reasons Not to Set Your Goal to Become a Millionaire“. I have been brooding over similar (complementary) thoughts for some time, and now, in light of Pete’s article, I would like to share them with you. Instead of talking about just the “millionaire” goal, I will try to generalize the thinking to our tendency of setting goals of the type: “I want to save $ XYZ in the next 5 years“.
Before we start talking about money, let’s brush up some basics.
Milestones vs. Goals: In a very few words, a goal defines your purpose and milestones measure your progress towards that purpose. Although it’s a very straightforward concept, it can be a bit tricky to understand. To make it easy, let’s discuss some American football. In the football field, yard lines are analogous to milestones - they are not goals, they just measure your progress towards your goal - which in this case could be the end zone. Really? Is the end zone really the goal for a football team? No, it’s again just a milestone towards a greater purpose - winning the game. If you treat the yard lines as your “goals”, you run the risk of loosing focus of your real end goal - your aim is to win the game, not just cross yard lines.
Similarly, (in my opinion) dollar amounts are just milestones towards some greater, more profound goal. Your financial planning cannot stop at “I want to save $ XYZ in the next 5 years”, there has to be some purpose beyond that. You need to ask yourself some questions like - why do I want to save that amount of money? what do I intend to do with that money? how will saving that much money add value to my life? etc. This will help you understand what your real goal (or real purpose) is and it will put your monetary milestone into perspective with respect to that purpose. It’s this real purpose beyond the dollar amount that differentiates between “hoarding” and “saving”.
Let’s look at some specific examples to understand this better.
- Happy retirement is a goal, and a million dollar target is just a milestone: This exactly what Pete has conveyed in his article that I linked to at the beginning of this post. You cannot ensure a “happy” retirement just by saving a million dollars - there are a lot more ingredients to your post-retirement happiness than just money. Here is a schematic that will save me a thousand words towards explaining this thought:
Similarly, we can try and understand a couple of other relevant aspects of life which are sometimes (unfortunately) tied to dollar amount “goals”.
- Good education for your kids is a goal, saving for their college fees is a milestone: Just saving a few hundred thousand dollars for you kid’s educational expenses is not going to ensure good education for him/her. Go ahead and work hard at those 529 plans, but don’t think that your work is done as far as “good education” for your kids is concerned. Motivating your kid to study, making good educational decisions for him/her early on, encouraging good study habits, etc. are some of the issues you will need to handle beyond the money part towards that goal.
- Being (and staying) debt free is a goal, saving a dollar amount to wipe out your credit card debt is just a milestone: If you saved enough money to pay off thousands of dollars on your credit card - congratulations, that’s commendable… but that’s just a milestone towards your debt free goal. Staying out of debt requires a proper mindset - no amount of money can do that for you. So while you are working towards reaching your dollar amount milestone, it is also important to work towards your bigger goal of staying debt free. This will include addressing your spending habits, addictions, consumerist tendencies, etc.
In summary, it is not enough to make a goal that says “earn $2 million by age 50″ - that $2 million is not your goal, that’s just a milestone. There is no problem with pursuing dollar amount milestones; in fact, they are essential measures of your progress. However, beware of the tendency to assign too much importance to these milestones - once you start doing that, you run the risk of losing focus of your real goals. Don’t let that happen - don’t let your dollar amount milestones distract you from your real end goals.