Often, when a Financial Advisor and a client talk about what the client wants to achieve, the conversation goes something like this:

Financial Advisor: I have this great software we can use to model different scenarios and see what it might take to reach your goals. So, what are your goals?

Client: I just don’t want to lose my money. And, also, I want to make more money.

Financial Advisor: Well, I can’t model that. Why don’t we model how to pay for college, or how to get $4000 per month in retirement, adjusted for inflation and net of taxes?

Client: Okay….as long as I don’t lose any money.

There is a disconnect between what the investment industry thinks of as “goals” and what clients think of as “goals”. For investment professionals, goals are something we simulate using advanced computer techniques (not us exactly, but definitely our IT departments). We try to account for inflation, changes in cash flow, Social Security, and taxes. Many advisors would love to spend their time with clients going through different scenarios, incorporating different rates of return, or simulating how changing costs affect your plan.

For clients, goals are more personal, and are harder to pin down. They mean more. Missing a goal in a simulation is a “projected shortfall” to an Advisor. But a client might be thinking, “Does that mean my kid won’t be able to go college?” Or, “Will I not have enough money to live on after I retire?” Beyond that, seeing a goal simulated on a piece of paper is not tangible. It may be a helpful exercise, as is often the case, but this tool has limitations. A goal set ten or twenty years out might as well be a million miles away. Who knows what will happen in 10 years, not to mention 20 or 30?

In reality, the work of defining goals and developing a financial plan is very important, but not so we have a mystical target in the distance to aim at. Here are two benefits to thinking about goals:

Identifying Trade-offs: What is the true cost of something? In economics, there is an idea called ‘opportunity cost’. It goes like this: the true cost of something is not only the price you pay for it, but what you can no longer buy with those dollars. For instance, if I buy a gallon of gas, I no longer have those same dollars to buy a cup of coffee. In a very real sense, the true cost of a gallon of gas includes the value of a cup of coffee.

Identifying what is truly important helps clarify the trade-offs you must make in order to give yourself at least a chance at the goal. If you want to replace your income in retirement, you’d better start saving - and you should probably keep an eye on how much you are spending. Maybe you don’t need that car when a less expensive one might do just as well. Maybe the local state college is better value of the money than the out of state private college. Maybe it’s not. You will have to decide whether the more expensive college or nicer car is truly more important than what you’ll have to give up in order to realize those goals, and that is part of the true cost of your choice. Weigh carefully.

Give Yourself Options: I prefer the word ‘options’ over ‘goals’ personally. Because we don’t know what the future will look like, thinking in terms of options makes a financial plan more flexible. Do you want to travel in retirement? Do you want to own a get-away home somewhere? Do you want to take up a new hobby as you grow older? Maybe these things will work out, and maybe they won’t. If you don’t start saving and investing now, you are guaranteeing they won’t happen. This is especially true in light of this one fact: options are expensive. Ask anyone who has purchased a car recently.

If you have $30,000 to spend on a vehicle, you can pick any car up to $30,000. If you only have $15,000, then the $30,000 car isn’t an option. Thankfully, for cars it’s pretty easy to find a $15,000 car which will do just fine, but the logic still applies to other areas of life. If you don’t do something about it now, you won’t have the choice in the future. You, like most people, probably don’t need a lot of options as you grow older. But wouldn’t it be nice to at least have a few? You don’t want to end up in a situation where you have no choices to make because you have no resources. Give yourself some options.