What’s your magic number? The (literally) million-dollar question.
People like whole numbers. They’re simpler to calculate and easier to track. This is why tips are rounded up to 20% (or down to 10% depending on the service) or why investors are worried if the Dow is below 10,000 or gold is above $1,000/oz.
Talk to anyone about their personal finances, and the magic number is $1,000,000. The holy grail which defines success for the average person. While personally I don’t think this is enough anymore (remember Austin Powers?), this remains the standard benchmark.
Of course, it’s good to have goals. But simply setting broad ones isn’t enough. If you’ve read through this site, you’ll know of Lean Life Coach’s Principles of Financial Management.
If you haven’t, check out each article. For now, I’ll summarize “Goal Setting”, which falls under #7 on the list. When you truly want to achieve your goals, you must create SMART goals. This acronym refers to goals which are: Specific, Measurable, Actionable, Realistic, and Time Based.
So let’s start over. What’s your goal? To become a millionaire. Okay, specific enough. You go through each step until you arrive at Time Based.
Geez, I have no idea how long it will take. Thankfully, there are numerous calculators out there to help you answer just this question. Problem solved right? Not really.
Deciding to test the value of each, I ran a sample on 10 different online calculators. Assuming the same variables for each (salary, savings, age, tax bracket,etc), the outputs returned interesting numbers. The results varied by 16 years!
That’s a really big range for determining such an important goal! Why does it vary so much?
Some of the calculators asked what percentage of my investments would be in taxable vs. non-taxable accounts or what I anticipated my annual raise to be, some did not.
For any model, your calculations are only as good as your initial assumptions. Much like the idea that housing would always appreciate or the use of mathematical models to design mortgage-backed securities, the underlying assumptions play a very important role.
Imagine if I told you I could guess your weight with three simple questions: your age, height, and if you liked McDonald’s. Doesn’t seem like enough information, does it? What about how much you eat there, how often you eat there, how often you exercise, or what your general metabolism is like.
Point being, the more detailed your initial assumptions are, the stronger the results. This is why creating SMART goals will give you a clearer picture. And the more clear the end result is to you, the easier it will be to reach that goal – kind of like driving in the rain versus a sunny day.
And of course, the world is significantly more dynamic than any of these calculators would have you believe. No matter how sophisticated the algorithm, there’s always the human element.
photo by Simon Davison’s