Put in a different way, why are you trying to build or maintain wealth?
Stop and think about it. If you are thinking about this, you either have a portfolio or aspire to have one. Why? What do you hope to do with the money? Is it that you are seeking the financial independence money can bring? Are you simply seeking to build savings and get out of debt? Perhaps to buy a second home? Setting aside to fund retirement or otherwise? Are you hoping to pay for your kids’ or your grandkids’ college education? Donate to charity, support your congregation or community?
For many people, there is more than one answer. A working-age couple could be investing for both their retirement and their children’s education. Retirees may seek to support their lifestyles and leave an inheritance to their family. Millennials who are just starting out may be balancing college debt with the need to start setting aside something for retirement, even though the latter is decades away.
There is no universal answer to the question of why money is important. Your goals are your goals. Think about them and write them down. It will help to organize your thoughts.
Get started, whatever your goals are, NOW. You know the amount of time between now and when the goal must be funded and the length of time you expect to spend cash on the goal. Prioritize them according to the importance of each goal. Only one goal can be top priority, only one can be a second priority, etc.
Consider a hypothetical couple, Bill and Jill. There are both recently retired and have children and grandchildren. Ensuring that they have enough to live on and pay for potentially two or more decades of expenses is their top goal. So, the number of years away is “now” and the spending duration is the remainder of their estimated life-span.
Let’s flip the script and consider Liz. Liz is in her mid-20s. She has college loans, some credit card debt and a little in savings. Her top goals would be to build up emergency savings and pay down her credit card debt. (Emergency savings would prevent having to rely on credit cards for unexpected expenses. Paying down credit card debt reduces the high level of interest being charged every month). She should put the estimated time it would take to build up adequate savings (e.g. $1,000 would be a start, with a longer goal of setting aside $10,000) and, separately, the estimated time to pay off her credit card debt. The next priority would be paying off her other loans, if any. Saving for retirement would rank as the fourth priority. This would be 40-45 years away with a spending duration 20-25 years, which is an estimate of how many years she would live in retirement. Even though this is the fourth priority, Liz should still seek to start saving for it now in case if her contributions aren’t as large as she’d like because of the priority given to her other goals.
To achieve our goals, we usually find themselves balancing goals with desires. The reason for ranking goals is to define what must take priority if push come to shove. Identifying your goals and assigning priorities to them forces you to think about why money is important and helps you to better determine your financial tolerance for risk. If we have no debt, we could assume a high level of market risk for any savings beyond what is set aside to cover emergencies. Conversely, if we are unsure about whether our nest egg is large enough to fund our retirement, inheritance should not factor into our portfolio plans.
