Some investors don’t think that they have any goals to work towards, so they are unable to add proper structures and frameworks to their investment portfolios. This episode goes through a framework to dig deeper for your financial goals by exploring what you want from life, and therefore your finances.

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Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs. So Shani, this is the last recording. We have one more after this. This is the last recording before your birthday.

Shani Jayamanne: I know, 32. What a feeling.

LaMonica: Well, I mean, you don’t know what it’s like yet. You have to wait a couple of days. And you’re going on vacation next week.

Jayamanne: I am. I’m going to Hamilton Island, but it’s supposed to rain the whole time I’m there. So I don’t think there’s much else to do on Hamilton Island except swim and eat.

LaMonica: Okay. Well, it’s Thursday. You’re not going till Wednesday of next week.

Jayamanne: Yes.

LaMonica: So there’s still time for the weather to clear up.

Jayamanne: The forecast to change. And it normally does.

LaMonica: Yeah, exactly. So think optimistically.

Jayamanne: Yes.

LaMonica: All right. So let’s get through these two recordings. So you can get older and then go sit in the rain.

Jayamanne: I’ve still got work before I go, but yes.

LaMonica: Well, no, I know just from a recording standpoint. All right. What are we talking about today?

Jayamanne: Today, we’re going to talk about goals. And the context for this is that I recently presented at a forum for young investors. And the purpose was to help them to understand the fundamentals of building wealth.

LaMonica: And these types of forums are always great because you get exposure to different perspectives. And that’s of course important. It’s something that we say a lot. There is no right way to invest. There’s only what’s right for you. And I actually went to this forum.

Jayamanne: As a young investor.

LaMonica: Well, yes. The funny thing, obviously, you said it was for young investors. Shani had a quota of people to bring.

Jayamanne: Yes.

LaMonica: And you ran out of young people. And you dragged me there.

Jayamanne: I did. Did you get anything out of it?

LaMonica: I mean, I did get it. I like watching you present. I know that you don’t love presenting, but you’re very good at it. And I really enjoy watching you present. But you and the other presenters spoke about the approaches that you all have taken that have brought you the most success.

Jayamanne: And I spoke about my goals-based approach. And there were others that had structures built around the types of assets you acquire and what time. And reflexively, people advocate for strategies that have worked for them in the belief that others will find similar success. And one of the presenters pointed out that the most of his wealth came from one or two stocks. And he advocated for young investors to use this approach.

LaMonica: Yeah, which is, I mean, it’s difficult when you have experienced a lot of success with this one type of asset to then leave that church of investing the same way you did. So, if you look at residential property in Australia, obviously, ownership and investment residential property has done very, very well. And you have a lot of advocates for doing that. But everybody just wants to maximize their wealth. Everyone wants to have as much money as possible. And of course, if it was that easy, we would all be doing it successfully. So, for many people, this pursuit of the most amount of wealth possible just does not work.

Jayamanne: And I’m the first to say that I’m not any different to the other presenters. I experience success with my strategy and I advocate for individuals to use it. And we both use the same strategy. We advocate for it during the podcast in all the articles that we write. And the difference with my approach, I think, is that it’s agnostic to investment style and the type of investment and asset classes. And a goals-based approach really just focuses on satisfying the rate of return you need to reach your own personal financial goals. And it’s centered around you and for the outcomes that you want to achieve. And it gives you a goal and the information needed to come up with a plan to accomplish that goal. And I think, you know, I believe that investments are a means to an end. I believe in maximizing outcomes instead of maximizing wealth. And that really means it focuses on what works for you and building a plan around that. And it means starting with properly defined financial goals. And there is a point to this.

LaMonica: Yes. And we will get to the point.

Jayamanne: Yes.

LaMonica: Now, as a young investor, obviously, I know this. But anyway, being around young investors, and I think, you know, talking to your friends and talking to some other people that come to you for advice, the issue is a lot of young investors don’t have a financial goal, which makes it hard, obviously, if you’re advocating a goals-based approach. But really, I think, you know, our view is that they don’t think they have a financial goal. And so really, what they do instead is they just try to invest in shares, try to maximize wealth, because they don’t really think there’s any other alternatives. And, you know, a lot of young people are obviously struggling with cost of living. Housing prices are crazy. They have student loans. There’s low wage growth. And so, for a 25-year-old who’s putting away $150 a month, getting a deposit for property is just kind of a laughable exercise at this point. And retirement just seems secondary, obviously, when you’re young. And especially if you can’t live a comfortable life right now.

Jayamanne: Yeah. And I think, as you said, this isn’t just theoretical. I’ve had countless friends approach me and say that it’s difficult for them to base their portfolios around their goals, because they just don’t have any. And they think that it’s not only impossible, but also not sensible for them to save for a property. They can’t afford their hobbies as it is and as it currently stands. And they invest in the market to maintain the purchasing power of their money and to grow their wealth. And I think, you know, Mark received a question from a podcast listener recently that echoed the same sentiments. And Mark wrote a great article on what to do if you don’t have a goal and don’t know what you’re saving or investing for. And I think, you know, my take out from that article is that life and circumstances do change. And it is likely that there will come a day when you’re pretty firm on what you want. And you’ll have a head start if you start investing now. Is there anything you want to add from your article, Mark?

LaMonica: I mean, you called it a great article, which is very nice. I mean, compliments are always great. But, you know, really, I think the premise is there’s this guy named Daniel Gilbert. And he’s a professor at Harvard. And he has, I guess, coined the term around this phenomenon called the end of history illusion. And at a high level is basically at any age, people don’t think their life is going to change very much going forward. And so they’ll look back in the past and they’ll acknowledge that that life has changed, but they just don’t see things changing in the future. And that, of course, is not true, because if you go and ask people at any age, they change a lot, in their 20s or 30s or 40s, et cetera. And so really, if we don’t know what we’re going to want in the future, what we should want is options, the ability to take advantage of these different options, the different things you want. And so that’s kind of a goal just in itself, right? Having options and saving money and investing so that you can take advantage of them.

Jayamanne: And sometimes it really helps to reflect properly on and understand what you want. And this exercise may surprise you, you may come out of it understanding what you want and the goals that you want to achieve.

LaMonica: Okay, so we’re going to go through the exercise now. So really it involves taking a deep dive in each aspect of your life, which, you know, some people like me just try to avoid completely, but really is just understanding where you want to be. So this isn’t to say, of course, as I said before, that over your life, things won’t change. We all change. Inevitably, we’ll want different things at different ages. And the likelihood, though, is that these intrinsic goals around what makes you happy may slightly adjust, but they’re unlikely to change completely. Although it does happen.

Jayamanne: So I recently read a book called The Virgin Millionaire by Ben Nash, who is a financial advisor. And there were a few questions that helped prompt his clients on goals. And they are what you want for yourself, what’s important for you, what’s important for your family and where you want to live. And we’ve just added a few more aspects to consider on this list. And I think this isn’t just for young investors, it’s useful for all investors to recalibrate what they’re aiming for and whether it aligns with making them happy. So I think let’s start with what you want for yourself.

LaMonica: Yeah. And it’s important to remember that these goals are about personal fulfillment and the type of life you want to live. I think the issue with these goals is that they’re often very influenced, of course, by what society tells you, you should be doing and achieving. And really, we want to think of these goals as independent of that. So one question you can ask yourself is, what do you like to do that gives you a sense of fulfillment?

Jayamanne: And I can start with myself. So for me, it’s travel.

LaMonica: Which you’re doing next week.

Jayamanne: Exactly. For others, it is hobbies that they may have that require ongoing funding over the long term. It could be flexibility to plan the day a certain way or a sense of stability. And I’ve casted out travel goals and run through an example of how to turn a hobby into a financial goal in one of the podcasts that we did, but I also have an article as well. Think about what makes you happy day to day and whether it needs an ongoing or future financial commitment that you should plan for.

LaMonica: Okay. And now we’ve got a big one that I feel like everybody has. And that is a goal of financial independence. So obviously, if we just take the inverse of that, the old Charlie Munger technique, nobody wants to be financially dependent on another person or a job or the government. And so financial independence, of course, is this ever-evolving concept where there are a series of milestones and as you hit one, you just want to move on to the next one. And that, of course, is okay. As we continue to grow as people over our lives, we can also grow financially as well. So each new step you take builds the foundation for financial independence. And so it’s important to think because everyone has a different definition. One reason the goal is so popular is because it’s so flexible. So understand what financial independence means to you is a great place to start.

Jayamanne: And as Mark said, this can kind of change depending on the stage of life that you’re in. So when I finished university, financial independence was an aspiration and it was a modest goal. So it was being able to pay my rent and all my associated living costs. And since then, I’ve gotten married and I’ve achieved career growth as well.

LaMonica: Because every other podcast, we announce a new promotion for you.

Jayamanne: Yeah, basically. I think I stopped though.

LaMonica: You literally got promoted last month. I spoke to my mother yesterday and she was talking about how proud she is of you.

Jayamanne: That’s very nice. Thanks, Karen.

LaMonica: It is very nice. Back to financial independence. Your journey.

Jayamanne: Yes. It means being able to be independently supporting myself regardless of any unforeseen circumstances now. And it also means that I have my own bank account. I have control of my paychecks and my finances are structured in a way where I can spend money in a way that suits me. So right now, independence from my employer isn’t a qualifier for financial independence.

LaMonica: Which is why you’re here today.

Jayamanne: Mark smiling, as I say this, but I have an emergency fund that I built to protect me in case I do lose my job. But I know that in the future, like in the past, my understanding of financial independence will evolve as I approach retirement and my definition will encompass independence from employers supplying my paychecks. So I’ve talked a lot about myself. Mark, what about you? Financial independence is obviously a goal for you. How do you think about it?

LaMonica: I think sort of historically similar, starting with an emergency fund and moving up. And actually, I had this interview with a reporter at the AFR and she was talking about your FIRE number. And so your FIRE number, financial independence, retire early. And so she was talking about that number and I was saying how there’s kind of stages to it. So I think I’m at a point now where I can afford to feed myself and have some place to stay. So kind of the bare minimum. But I think now it’s trying to build in, hopefully by the time I’m retired, building in more of the life that I want to live. So that’s like another kind of staging of it, I think.

William Ton: I’m Will, producer of Investing Compass and here are this week’s must reads on Morningstar.com.au. As cost of living increases and careers become more demanding, many younger people are also turning into income investing. As more Aussies move towards this style of investing, we must understand what the opportunity cost is. In Shani’s Future Focus column, she looks at the insights for investors from a man that’s responsible for $16 trillion. Salim Ramji is the new captain at the helm of Vanguard. His recent visit to Australia included a conversation with Jonathan Shapiro, which revealed insights into how Salim sees the world and how investors can apply those insights to how they invest.

A study found that younger generations are disengaged when it comes to their super and this really isn’t surprising. It’s hard for young people to be excited at the prospect of retirement. But the reality is, failing to review your supers like cutting a hole in your wallet and walking around as the money falls out. This week, Sim explores how your level of engagement with super can have a significant impact on your retirement outcomes. Every big decision in life has its trade-offs. This can make it harder to make a decision in a first place and perhaps even worse, lead to regrets seeping in later. In this week’s Bookworm, Joseph explores a simple three-step method for tackling life’s big choices with confidence, from deciding between two jobs to choosing whether to rent or buy. These articles and more are now available in the show notes and now it’s back to Mark and Shani.

Jayamanne: All right, let’s move on to what’s important to you. Your money philosophy relates to the lens through which you view money and this is often shaped by your own personal experiences and your relationship with your finances. Understand what gives you peace of mind with your money and what aligns with your values. So these goals could be philanthropic, it could relate to education, the standard of living that you want to maintain. Have a think about what these activities would cost for you to maintain. So for example, if it’s important for you to ensure that you continue to be a lifelong learner. So if you’d like to continue further education and receive formal qualifications, you can cost that and work towards it.

LaMonica: All right, and then there’s where you want to live or work, if that’s important to you. So I think it’s important to both of us. You want to move further away from me

Jayamanne: We live in like neighboring suburbs.

LaMonica: I know, I can walk to your place in like 10 minutes. So that’s why you want to move far away.

Jayamanne: Well, it’s easier for you to move than me, now that I’ve bought.

LaMonica: I mean, that’s true. That’s true. But I just signed two-year lease.

Jayamanne: I guess we’re stuck with each other.

LaMonica: Well, there we go. So I think the obvious question we talked about this a little bit is, is purchasing a house feasible? And if it’s not, then what is? And this could be back to your goals of financial independence. So reasonable goals would be to have enough savings to consider, to cover a 5% rent increase or whatever percentage you want to put on there, so that it doesn’t impact your quality of life or being able to build a passive income stream that allows you to live closer to work or afford to live close to the beach, if that’s something that you want. So not all financial goals have to be mammoth multi-decade achievements. Find ones that will make your life better and align with what makes you happy.

Jayamanne: All right. So we’ve got, what do you want for yourself and your family? Depending on your family dynamics, you could want to plan for your children’s education costs or for your parents’ care costs later in life, or it could be both. We’ve spoken about this in our podcast on the sandwich generation, but both of these can be significant expenses. And if they are preemptive financial goals, they can be managed better to take the pressure off. And this can be a great goal for not just giving you peace of mind, but also helping with cash flow in the future. So you’re able to continue funding or investing for other goals that you’re yet to figure out.

LaMonica: Do you have Priscilla related goals?

Jayamanne: I do, but then they’re not, they’re Priscilla adjacent.

LaMonica: I won’t bring up because I know that you have like a really insane one.

Jayamanne: I can talk about it. It’s called the Priscilla Death Fund. I know I’m going to be inconsolable upon his death.

LaMonica: But this pot of money will help a little bit.

Jayamanne: Yes. And so I want to use it to move to Paris for a year and just like cook in a nice kitchen and take walks and eat lots of butter. And yeah. So I just like that the issue is I obviously don’t know when he’s going to die.

LaMonica: No.

Jayamanne: I hope not anytime soon.

LaMonica: You can probably guess. Dogs don’t live till they’re like 30.

Jayamanne: Yes. So anyway, we’ll see.

LaMonica: All right. We’ll get back into, I’m not going to say sane, more typical goals. Like how would you, what would you do if this was a person?

Jayamanne: Like do you think I have a death fund for my husband, Matt? Or I got to know.

LaMonica: I mean, maybe. I don’t know. If you want it quicker, you should have one for me. All right. So let’s get back into, Shani described how she wants to spend her time, which is eating butter in Paris. But another important goal is how do you like to spend your time? So a lot of us can’t afford to retire at 40. For some of us, we’ve obviously missed that deadline, no matter what. But even if you’re just trying to retire one or two years early, that can give you something to look forward to. And that could improve your quality of life a lot. So if you have enough runway and you’re consistent with your savings, that’s an achievable goal. So we’ll go through an example because we like using examples. So let’s say that the savings needed, the savings that you need for $1 million by the time you’re 65, based on a 7% return. So obviously different ages, there are different amounts you need to save. So $405 a month, if you’re 25, jumps all the way up to $1,970 a month when you’re 45. So most of us will need a lot less than $1 million to fund a slightly earlier retirement. So if we start early, compounding does a lot of the work for us. That is of course, if you’re someone that can’t wait to retire like Shani. So you may decide that you want to work for yourself or you want to drop down to four days a week, spend more time on hobbies like eating butter, for example. So find a goal that you can cost and then work towards it.

Jayamanne: And you could always work towards improving and maintaining your health, Mark.

LaMonica: What do you think I should do to improve and maintain my health?

Jayamanne: Get some sleep, don’t work out with injuries.

LaMonica: I thought going to the gym is something that...

Jayamanne: Not when you’re injured, but as you get older...

LaMonica: I’m 45, I’m always injured. You’ll get there.

Jayamanne: I’m already there, to be honest. As you get older, the likelihood of getting a chronic illness is high. Your goal may be to save towards being a bit more comfortable during this time as the financial costs do spike with specialist visits and other healthcare costs. Your goal may be to build in a buffer to afford fitness or mental health resources and not have to go without if you need access to these resources.

LaMonica: And then, of course, there’s your legacy and impact. So is there a specific legacy that you want to leave? So whether that’s for family members or for causes that you care about, these financial goals can make many people feel fulfilled and also have no minimum cost. So whether it’s large or small, legacies can have a meaningful impact as long as you’re leaving it with intention.

Jayamanne: And lastly, open up choices for your future. And the purpose of this podcast was that it intended to raise some questions for you. And that is what gaining an understanding of your goals is. It is reflecting inward and understanding what you want your life to look like and how you can achieve it with the financial resources that you have.

LaMonica: And if you still can’t figure out what you want to save for, just start investing for a future goal you might have. Make sure that your funds are at least maintaining their purchasing power. This doesn’t mean that you should take speculative bets and trying to find one or two stocks that are going to change your life. So many investors have done exceedingly well by just getting the market return without trying to beat it. Taking this approach may help avoid the poor behavior that really destroys returns for a lot of people and people just trying to be the next Warren Buffett. That is our goal podcast.

If somebody has a stranger goal, then Shani’s Priscilla death fund, please send me an email because I want to hear about it. And also I think that every week we should do an update of where you are with the Priscilla goal.

Jayamanne: Not far. He’s only three, four.

LaMonica: Do every paycheck just money go in?

Jayamanne: Every month, yes.

LaMonica: Well, there we go. All right. Well, thank you guys very much for listening. Priscilla, if you’re listening out there, I’m sorry.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)