What is the risk of following your dreams?
There is a lot to unpack in this succinct question, so let’s take a moment to break it down: To answer the question, we must first define our dreams (in this case, we’ll use “dream” to refer to a passion project, like starting a business, rather than, say, sailing around the world on a 46-foot yacht); then, explain the potential risks and rewards that go along with chasing our dreams; and finally, we must forecast the likelihood of potential outcomes to occur.
Whew, that is a lot to take on at once. I struggle with it on the best of days. Let’s roll up our sleeves and get started, shall we?
First, let’s take some time to talk about our dreams.
For the context of our discussion, dreams do not have to be exact goals, nor do they have to have specific time constraints. Instead, let’s think of dreams as passion projects we wish to be working on in the future. From this baseline, dreams can take on any additional level of detail you desire.
In any context, dreams should act as our north star, serving as a compass to help guide us through all the tough decisions we must make in the short-term.
And let’s be honest, the above graphic is wildly optimistic. Real life looks something more like this:
Now that we’ve established a north star, let’s take a moment to think about the journey we’ll take to get there, or in other words, those little troughs in the diagram above. Did you notice how one of them actually goes below our stick figure’s feet? That’s the rough patch we need to think about next.
When faced with all the complexity and all the unknowns in life, I ask a simple question (a “hack” in today’s lingo): What is the worst that can happen?
Our initial inclination is usually a financially focused, short-term risk, such as, “I could lose my job.” For some reading this, that makes the risks and rewards of pursuing your dreams seem much more like “risk” than “reward.”
The thought of losing one’s job is certainly a daunting proposition, but how much will this temporary status affect your long-term standard of living?
Actually, before you answer that question, let’s take a look at our dire situation from another angle: How much money do you need to make in order to be happy?
This is not to say that money buys happiness—far from it—but there is a certain financial threshold that goes along with everyone’s lifestyle choices that we all must acknowledge. According to a study by Purdue University, there is a certain dollar amount at which people are satiated: “We found that the ideal income point is $95,000 for life evaluation and $60,000 to $75,000 for emotional well-being. Again, this amount is for individuals and would likely be higher for families.”
All right, enough on this subject for now. Let’s get back to our original programming.
In some cases, sacrificing our financial floor—our standard of living requirements—will be the greatest risk we face. However, before settling on finances as the final answer of the worst-case scenario, we also must consider another opportunity cost as part of this risk/ return equation: time.
Opportunity cost is the difference in returns on the option you chose versus the next-best option. With time, you may weigh the potential outcomes of entering college right away versus taking time off to travel. Or, you may weigh the emotional return on spending time with your family versus working overtime to save more money. Remember, this is not the same as considering “sunk costs,” or the money/time that you already put into one option after which you realize the other option had a better return.
Time is the great equalizer. It is the one thing in life we cannot get back once it is gone. Looking back at our north star diagram for a moment, we may realize that while we may face some short-term financial risk, our bigger risk is the time we have available to reach our goal.
We have a set number of days in our lives and with that comes a fixed number of opportunities. Money can (and will) ebb and flow. Emotions will do the same. They are the real roller coaster I was trying to plot out in our journey to a north star.
Given this context, each decision you make to evaluate the risks and rewards of pursuing your dreams can be examined in its proper light: Does it move us incrementally closer to our dream in a satisfactory amount of time?
In some cases, the short-term risks we face may cause us to sacrifice the potential return of making a marginal amount of progress towards our dream.
However, as is so often the case, the short-term risk—whether it is financial, emotional or something entirely different—will be outweighed by the simple reminder in the title of this article: life is short.
Get working on making your dream a reality.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: The Very Basics – Forming the Business and Goal-Based Investing – Planning for Key Life Events. This is an updated version of an article originally published on January 29, 2018.]
©All Rights Reserved. June, 2020. DailyDAC™, LLC d/b/a/ Financial Poise™
Tom Kirby is the founder of Chicago-based file sharing service PrepDD. Before that he was Vice President of Business Strategy and Director of Finance and Operation for VIN-specific auto marketing technology company LotLinx, also of Chicago.
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