It’s important in life to have long term goals, too many of us worry about today, tomorrow and this weekend, without ever looking at 5 years, 10 years, 20 years. The problem with long term goals is that as we grow and change, so do our goals. Goals you set 10 years ago may no longer make sense for the life you are living now. The future is extremely uncertain no matter how well we plan for it. If we constantly change the goals we set, then we never get the win of achieving these goals, this is why we need to be vigilant of any changes we are tempted to make to them.
Setting Long Term Goals:
I’m great at looking into the future, looking at my current situation and setting long term goals. The problem is that I do this like every six months. The newest version of the goals replaces the last one, and like upgrading your cell phone when it still works just fine, I tend to upgrade my goals that were just fine. The problem is that the upgrades never stop and I never get that “win” of accomplishing the original goals.
Last week I came across a backup CD-Rom from 12 years ago that included a spreadsheet on investing in my Roth IRA. It showed that with $2,500 yearly contributions and 12% gains, If I stopped contributing at age 36 I would hit $1 million at 51. Being a millionaire by 51 is a pretty good goal, and yes I am aware that 12% gains are highly optimistic, keep in mind I was 19 when I made this spreadsheet. The point was that my goal was to save $2,500 per year. At the time that seemed almost unachievable. Today saving $2,500 in a year is not a challenge at all.
When I started this blog in 2013 my stated goal was to hit financial independence by age 45, which many would consider quite lofty. At the time I was saving around $12,000 per year. For several years I had the ability to save more than $2,500 per year, but I had put most of that savings towards purchasing our new home, with nothing going into retirement savings. Since I started Action Economics our household income has grown and I have updated that goal to hitting financial independence by 40.
Increasing Long Term Goals:
I remember thinking many times, ok, our income has increased to “X”, therefore we should save damn near all of the increase and save a total of “Y”. My long term goal has gone from saving $2,500 per year to $6,000, to $10,000 to $12,000 to $20,000 to $25,000 to $35,000 and now to $40,0000. At no point have I been able to look back and check off a box stating, yes, this goal has been accomplished. Not giving ourselves a win is counter productive to long term goals. By changing the goals constantly, we will never achieve them.
Last year Mrs. C. and I had an AMAZING year and had a big increase in gross income, allowing us to save over $30,000. This year on paper looked like we could hit a 50% savings rate and save just over $40,000. That’s 16 times what I thought would be almost impossible to save in a year when I was 19, and when I step back and look at it seems unreal.
With the goal of saving $40,000 per year I have been laser focused on that and have tried to do everything I can to adapt to make it happen when we have hit large or unexpected expenses. This year health issues have been the main driver of expenses over our base budget. Mrs. C was diagnosed and treated for Graves disease, our oldest kid is getting braces, and kid #2 needed an expensive computer program to help with a vision issue.
After Mrs. C.’s health scare I took a deeper look into our health insurance. Because we get our health care through the Obamacare exchange, we have to estimate our yearly income, well when you have 4 employers this can be a bit tricky. If you underestimate, as it looks like we did, you have to pay back the difference between your plan price and the price you should pay based on that higher income, but that payback amount is capped if your AGI is below a certain level. For a family plan it is capped at a $600 repayment penalty if your AGI is below 200%, and $1,500 if below 250%. Our kids are all on the Michigan expanded Medicaid program, which is for families with an AGI below 212%. In order to keep their healthcare the same and to keep us from paying a stiff penalty we need to ensure we contribute enough to tax advantaged accounts to stay under 200% of the FPL for a family of 6, which is $65,920.
I also have set a goal of having the house paid off by Fall of 2020, which necessitates putting at least $17,500 extra on the house every year. To meet both of these goals our total savings has to be approaching $40,000. The problem is that both of these long term goals were newly created, and artificial. Just because an incentive exists, doesn’t mean you have to completely change your life, or completely leave your life unchanged. It won’t be the end of the world if my house isn’t paid off until 2021. If I have to pay an extra $1,500 in health insurance it won’t be the end of the world. Basically I’ve optimized our finances to about a 95% level and I’m chasing that last little bit.
What Difference Does A Marginal Dollar Make?
Here’s the thing, with a high savings rate and a relatively short time horizon, what difference does it make if I save $35,000 or $40,000 per year? That extra $5,000 of savings per year only shifts our financial independence date up 6 months. To hit Financial Independence we need a paid off house and $428,000 in the bank ($30,000 per year on a 7% withdrawal). With 10% annualized returns if we save $40,000 per year we should hit this when I am 37 1/2. If we save $35,000 per year we will hit F/I when I am 38. If we save $30,000 per year we will hit financial independence at 39. Bottom line: that extra $5,000 of savings makes very little difference in the grand scheme of things. Saving more money is good, but for our lives it really doesn’t matter if we cross an imaginary line in the sand at 37, 38, or even 40. What matters is that it won’t be 65 or 70. We both plan on continuing to work after hitting F/I, so nothing in our daily life will actually change when we achieve F/I.
Saving an extra $5,000 per year when you are saving $2,500 per year makes a world of difference, but at $35,000 per year not so much. That’s a 200% increase vs. a 14% increase. As time has gone on and our income has increased I have ratcheted up our goals. That’s okay to some extent, but after hitting an incredibly high savings rate it is OK to enjoy some of the money that we have earned. We’ve been living off of a $40,000 a year budget with 6 kids, which is extremely low. Increasing our spending by $5,000 per year would make a world of difference, more than doubling our discretionary income.
Attacking “Delayed Spending”
Have you ever said, “I know this needs to be done eventually, but can it wait a bit longer?” There are many aspects of life we have done this with for years. There’s clothes in my closet I’ve had since I was 15. We have a couch that Mrs. C. has hated since not long after we bought it 9 years ago that the kids have destroyed. We haven’t replaced the filter in our fridge, my saw blades, or our house phones that barely hold a charge any more. Now that we are saving far more than our goals used to be, I think it’s about time to attack some of these items.
One of the catalysts for this line of thinking was a discussion I had with my sister recently. She had mentioned her personal annual clothing budget, which is several times more than what our household of 6 spends on clothing. To be fair, she has a very professional job and needs to dress nice for work, while I just need to make sure my jeans don’t have holes in them. It’s good that the habits we formed when we were earning under $30,000 a year as a household have stuck around, but at the same time some of these habits don’t make sense anymore. You don’t have to save every penny you earn above a limited budget. The path to financial independence does not have to mean self sacrifice. Our kids are young now, and for this brief snapshot of time all 4 of them are living together. In just 5 years our oldest could be leaving the house. We are already savings a tremendous amount of money and spending a little bit more money on things and experiences that make our lives more enjoyable is an OK thing to do.
My Solution To Ever Increasing Long Term Goals:
I don’t think I will ever stop adjusting my long term goals. I like to analyze things and I certainly am motivated to set up future John C. as best as possible. What I think I should do, and you should as well, is keep a spreadsheet of all your long term goals as they change and develop, never deleting the old ones. (Why does it seem like my solution to all of life’s problems is to build a spreadsheet…signs I might be a nerd. ;) ). This way as your goals adjust you can still look back at the goals that cover the same aspect of life that were set a long time ago and put a check mark next to all of them that we are on track to achieve.
Do you have ever increasing long term goals? What solutions do you have for this problem?