George Clooney’s character in the movie “Up in the Air” delivers a fine example of saving without a purpose when it comes to airline miles.
The movie offers a personal finance gem:
Sometimes we can get so bogged down in the process of making money that we lose sight of the eventual purpose for which we are saving that money.
Clooney’s character in the movie (Ryan Bingham) is obsessed about collecting frequent flier miles.
There is one thing different about his obsession.
Unlike most travellers who collect miles for an eventual free trip or a holiday, he has no eventual goal set for the miles he is collecting.
For him the collection of miles becomes the goal in itself. He is collecting air-miles just for the sake of collecting air-miles.
We are all susceptible to falling in that trap when it comes to our relationship with money.
At times we end up doing with money what George Clooney’s character is doing with airline miles.
Saving Without Clear Goals is Meaningless
You work really hard every single day at your job.
You hope the company will notice your performance and reward you with a salary hike or a big bonus.
Every once in a while you may also argue with your boss about how your salary is not high enough and you deserve more.
All this is part and parcel in the daily life of a corporate employee.
Our jobs are the primary source of our incomes that allow us to make a decent living.
Depending on how financially prudent you are, you might be saving a small (or hopefully a large) part of your salary each month.
Now ask yourself – How well do you know exactly what are you saving for?
There are a number of things that may immediately come to your mind to answer that question.
You want to offer a better quality of life to your family, good education for your kids, get proper medical care for your ageing parents or some other cause that is personal to you.
Now those are indeed good and the most common reasons why we push ourselves to do well (and earn more) at our jobs.
But there is a small glitch in that thinking:
A majority of corporate professionals miss out on taking the next critical step in their saving journey.
And that step is – Putting a specific money value to each of those individual financial goals that you are saving for.
Saving Money Should Be Linked to Specific Financial Goals
“If you don’t know where you are going any road will take you there.”
Alice in Wonderland
If you don’t know what you are saving for you can easily become disoriented in your personal financial journey.
We put in an extra-ordinary amount of effort to earn more money but spend very little time in actually tracking how it is helping us to get to our goals.
It is always good to have more money but do you know exactly how much more money you need?
How much further do you need to travel on your financial journey?
Are you already at 10, 20 or 50% of your way to your eventual financial destination?
Once you are able to put a specific money value to each of your financial goals it will become much easier to start working towards those specific goals.
Consider this example:
It is one thing to say that you are saving money for your daughter’s college education.
That in itself does not give you a clear target to work towards.
Now compare this with a specific financial goal – I will need USD 25,000 for my daughter’s college education and I will need it 8 years from now.
A clear money goal like this helps to turn your future financial plans into specific milestones that you can start saving and investing towards.
These financial goals become a subset of your overall financial plan that you should aim to have in place.
Clear Financial Goals Will Help You Choose the Right Investments
How you invest your savings will have a huge impact if you are ultimately able to reach your personal financial goals.
As we have seen earlier there is only one real secret to getting rich.
Saving money, investing that money and letting it grow till you reach your financial goals.
(There are of course some faster options like winning a lottery, visiting a casino or marrying someone really rich but that is a different discussion)
Every day you come across various offers for investing your money. A piece of real estate, some deposit scheme in the bank, an investment fund and many more.
So how do you decide which one should you go for?
They all look good in isolation but very different when you consider them as a tool for reaching your specific financial goal.
Putting money in real estate or a stock market linked investment can be completely ruled out if your daughter is due to enter college next year.
That time frame requires you to keep your money in a low-risk investment that you can quickly withdraw next year.
On the other hand if college is more than 10 years away, then a stock market linked investment fund may make much more sense compared to a low interest bank deposit.
A plain bank deposit for 10 years is not the best place to grow your money if you want to reach the USD 25,000 that you are aiming for.
An investment idea can be good or bad at a given time depending on how it ties up with your eventual requirements for that pot of money.
Most sprinters keep their head down when they are about to start a race. Once they are off the starting blocks they raise their heads and start aiming for the finish line.
As busy professionals we spend way too much time looking down to see how fast we are going on our personal finance journey, but we don’t look up often enough.
Your financial goals are the finish line of your personal financial wellness journey. Unless you take the time to look for them in the distance you won’t know how fast you should actually be running.
And you know what – Your finish line may actually be much closer than you think. Maybe you don’t need to be running this fast for the remaining distance.
You may still win the race even if you run a little slower from hereon.
Dushyant Choudhary is the founder of dushyantnomics, an early retirement blog for professionals. Dushyant retired early from his 9-5 corporate life after a successful international career. He brings his knowledge and experience to his current role where he’s dedicated to helping professionals achieve a fulfilling retirement.