“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” Turns out, Yogi Berra might have been a half-decent financial planner.
I am by nature a goal-oriented person. Once I know where I’m going, I make a plan and work towards it, with what I think is probably an above-average level of focus. While this means that I disapear from my friends’ (and somtimes even family’s) view for weeks or months at a time, once I’ve got a goal in mind, I focus a lot of energy attaining that goal. This approach generally works quite well for me.
And yet it occurred to me several months ago that I had no specific goals for my finances. I hope to retire some day, I hope to pay off my house some day, and I hope to be able to pay for life’s little surprises, (like a new water heater this past winter) without having to go into debt to do it. While those are all good goals, they are far from specific. Also, I had no specific order in which I was trying to achieve these goals; house first, or large passive income first? What about simultaneously? I have come to realize in the past year or so that because I didn’t know exactly where I was going, I was having trouble getting there.
I guess the good news is that during my years adrift at sea, I worked hard at learning about investing, and at accumulating capital that is currently generating a modest monthly income. The bad news is that, had I been more focused, I think I could be further ahead than I am right now.
Why is setting financial goals so hard?
Part of what makes setting financial goals so hard to set is the fact that they are generally so big; paying for a house can take decades. When it comes to retirement, accumulating enough money to live off of for three to four decades can take most of a person’s adult life. The enormity of such tasks tends to be off-putting to many people, and I have to reluctantly admit that this has also been somewhat true for me. The good news, I guess, is that once I recognized this deficit in my plans, I was able to mull it over, and come up with an answer.
What’s the financial plan, loonie lover man?
The current plan is I need to take care of paying off my house first. With interest rates where they are, I, like many people, have become more complacent than I like to admit. At this point, it is an (almost) absolute certainty that interest rates, when they move, will be going north. As I am paying a floating rate, that means more money each and every month coming out of my pocket, for no additional benefit. Once my house is paid for, life gets much, much cheaper. Also, the money I am able to save and invest will truly be my own.
One reason I have been reluctant to sell my investments to pay off my house is that my investments are currently earning a higher rate of interest than I am paying on the house. As such, it is mathmatically advantageous to leave things as they currently are. The problem of course is that circumstances will not stay “as they currently are” indefinitely. When interest rates go up, some stocks could get hammered as income investors pull out and move back to bonds. That could leave me with capital losses, and those companies’ stocks would then have a higher yield, so they might feel less pressure to raise dividends; I would be stuck with lower-priced stocks, and an income that might not increase to match my higher monthly payments. I’ve come to the conclusion that I’ve caught much of the recent run-up, and really should cash in my chips, before the plug gets pulled and my gains evaporate.
The problem now is, actually pulling the trigger when you feel you may be getting out early isn’t easy. But, once you’ve made a plan, you have to see it through, ’cause that’s what Brian Boitano’d do.
I’ll get back to you when I’ve had the courage to sell my precious stocks.