To be successful in this life, either personally, financially or otherwise, you have to have goals. It’s not just something our parents and counselors have been babbling about our whole lives; it’s a fact. Even those who aspire to be successfully lazy must set a goal to be adequately lazy each and every day! So as in any other endeavor, being an investor requires a little goal setting.

“If goals are imperative, then what goals shall I have?” you may be asking yourself. Whatever the goal may be, it must have some purpose, and it must have smaller sub-goals so you can consistently have small victories (a very real morale boost). I often run across people who choose $1 million dollars as a goal because they want to be a millionaire. But really what does that mean? A millionaire today is not the same as a millionaire in 1905, and will not mean the same thing in 2055. With an annual inflation rate of 3.5% for the last 80 or so years, a million dollars looses half its value every 20.2 years.

It’s frustrating to see such a purposeless goal — floating about without any foundation — because without a purpose a goal is just an arbitrary target that is too easily changed at a whim. A goal must have meaning and a foundation on something real. Fear not though, for I am here. I present, for your consideration, my milestones…

My Milestones
1. Total Investments of $150,000
2. Total Investments of $500,000
3. Total Investments of $1,000,000
4. Every-day Wealth
5. Uncommon Wealth

First, Some Qualifications
So you ask, “What’s so great about your milestones? Aren’t they just purposeless numbers?” Oh my dear reader, allow me to continue. Let me first say that all my goals are in 2005 dollars; making a dollar goal without accounting for inflation is like running uphill against the sand! While you may have made enough steps to reach the goal, the real prize is still a ways off.

Also, my goals are based on Total Investments not Net Worth. My reasoning for this is while your house and car and other assets are worth something, they don’t particularly earn you any money. Additionally, I feel like personal belongings should never account for one’s net worth. It places too much emphasis on acquiring possessions, which is not my style. (And the great thing about goals is that if you don’t like mine, make up your own!) Finally, don’t concern yourself too much with what “wealth” is at this point. I will deal with that definition shortly.

My Purposeful Milestones
My first goal is $150,000. I call this my “Financial Advisor Milestone”. Generally, financial advisors only service clients with a certain level of net worth. From my research, it seems that $150,000 in total investments is where advisors will start taking you seriously. While I don’t plan on using an advisor, it’s nice to know the option is there… and isn’t life about giving yourself options?

Second is my $500,000 milestone. I call this my “McDonald’s Milestone.” I’ve been passionate about franchises for some time, ever since reading “The E-Myth”, by Michael Gerber. Franchises and other small businesses start to become options for the individual investor at about the $500,000 level. This sum includes not only the cost of the business (about $250,000) but also enough cash to live off of for two years, and a little cushion. Owning a business like a franchise is a great way to work hard, and see lavish returns.

Third is my $1,000,000 milestone. I call this my “It’s-All-Downhill-From-Here Milestone.” We all know that making your first million is the toughest. Pegging my million against inflation means that I have a solid goal that records an achievement: Only 300% to go! Now on to wealth….

What is Wealth?
Is wealth quantifiable? Well, I suppose it depends on who you ask. My favorite definition of wealth is from Robert Kiyosaki’s famous book, “Rich Dad, Poor Dad”

Wealth is a person’s ability to survive so many number of days forward… or if I stopped working today, how long could I survive?… [It] is the measure of the cash flow from the asset column compared with the expense column… So I am not yet rich, but I am wealthy. I now have income generated from assets each month that fully cover my monthly expenses. If I want to increase my expenses, I first must increase my cash flow from assets to maintain this level of wealth.

To paraphrase Kiyosaki, when you can happily live off the income, interest, and/or growth your investments generate each year (after inflation) without diminishing your investments then you are wealthy.

For me, wealth comes when my investments generate $90,000 (2005 dollars) in cash per year. $90,000 is a good number because one can live comfortably on that much almost any place in the world. This is what I call being Everyday Wealthy. To determine how large of a nest egg I’ll need to build (in today’s dollars) to generate that much each year I used the simple formula:

Nest Egg = (Wealth Level)/(Annual Growth – Inflation)

With that formula I calculated the following:

$2,571,429 = $90,000/(7% – 3.5%)

Pretty simple, right? I prefer to use the more correct inflation rate of 3.5%, and 7% is about what one can expect from low-risk investments such as bonds, blue chip stocks, etc. So now I know what Everyday Wealth is in today’s dollars. What does that mean in terms of Actual Dollars? The answer depends on when I retire:

2037: $7.73 million
2042: $9.18 million
2047: $10.91 million

Get it? So that’s how I determine wealth. Uncommon Wealth is basically the same thing, but at a higher annual salary rate…. it’s not really important how much it is; try finding your own wealth goal!

The Bottom Line
Goal-oriented investing is smart investing. It helps keep you driven, and motivated to achieve that next level. By setting reasonable and purposeful goals, one always has a reason to get reach them, as well. I’ve put together a Wealth Calculator in Excel to help you map out your goals, and see what size nest egg you can reasonably expect for your age and circumstances. Enjoy!