Morning! Today I have a guest post from Ben Carlson who blogs at A Wealth of Common Sense. Ben writes about personal finance, investments, investor psychology and using common sense to get ahead financially. You can follow him on Twitter or send your questions via email. Enjoy!
What would you do if money was no object? I don’t mean what would you spend it on or what debts you would pay off. I mean what would you actually do with your time? Would you travel the world? Live in a condo on the beach? Spend more time with friends and family? Quit your job? Volunteer and give back through charitable work?
Answering this question is not so easy. When people have the “What would you do if you won the lottery?” discussion that always comes up when the Powerball jackpot hits some huge figure, they mostly talk about what they would buy first. But the hard part would come after you buy those things that you want. How would you be happy spending your time if you actually gained financial independence?
You can use this exercise as a framework for going through the process of planning your long-term financial goals. Instead of trying to save a million dollars for retirement, ask yourself what you would do if you actually did retire. Focusing on why we are saving and investing for the future can help shape our goals, make them more realistic and keep us motivated.
Everyone’s situation will be different. Living a wealthy life has a unique meaning for everyone. Some of us want materials possessions. Some just want the freedom to make their own decisions that aren’t based on living paycheck to paycheck. Others want the ability to take a vacation or two every year without going into debt. Whatever the case may be you need to figure out what being wealthy means to you.
We all have a pretty good idea about the main tenets of personal finance (save more than you earn, invest early & often, track your spending, stay out of credit card debt, etc.). But delayed gratification is tough. Especially in the information age that makes it so easy to get everything you want right this minute. It’s much easier to buy things now on a credit card than save for a retirement that is so far off into the future that it’s hard to even imagine.
In the 1960s and 1970s Stanford conducted a series of studies to see how children would react to delayed gratification. In the follow-up years later they actually found that the children that were able to wait longer for their reward turned out to be more successful than the children that could not.
Setting long-term goals is no fun for most people. Looking out into the future to plan for retirement or your children’s college fund can be depressing because we equate these goals with getting older. So we tend to get into the habit of putting off these issues for another day.
Studies show that humans learn a great deal when they receive instant feedback, but not as much when the results take longer to process. If you can’t see the consequences of your behavior it’s really difficult to make changes.
Now, I’m not one of these personal finance people who tell you that you should never spend any money on anything and only save for the future. That’s no way to live and enjoy life. You must also have plans for your short-term and intermediate-term goals. Travel to Mexico every year if that’s what you want, but make sure you plan ahead for it by making it a goal and save in advance. You just have to prioritize.
Most of us are used to hearing specific advice when it comes to financial planning. You need to sell your stocks right now or risk massive losses. Or buy gold now because it is heading for huge gains in the coming months. But when taken out of context with your personal situation this advice means nothing for you or your long-term goals.
Going through the process of making a long-term plan will help greatly. It will force you to think about things like how much you will need to save to meet your goals. This also helps in setting your investment risk profile and time horizon. Since life happens and circumstances can and do change, take time to make periodic updates to your goals and financial plans along the way. This allows you to track your progress as you go and make any necessary changes.
Start by setting your long-term goals based on what you would like to do in the future and focus on why you want to accomplish them. Figure out where you are currently (salary, net worth, spending habits, etc.) and where you would like be (financially independent, retired, vacation, etc.). The specifics of your investment plan will be much easier to determine once you have these goals in place.
Living a wealthy life is different for everyone even when money is no object. Going through the process of creating a long-term plan can lead to a more meaningful and wealthy life once you finally reach financial independence.
So how would you spend your time if money was no object?