By Eric
So you understand that planning without goals is folly. That’s a great first step. The next step then, is to figure out what those goals should be. The problem becomes that those goals can often seem out of reach.
For example – you are engaged and planning to get married, and you believe you need to save $10,000 for the wedding and honeymoon in the next 6 months. Yikes! That can seem so overwhelming, that often times it is easier to stick your head in the sand, ignore the giant, looming, seemingly insurmountable goal.
Another example – you made some mistakes earlier in your life with credit cards but have now decided it’s time to get your financial house in order. However, when you add up the balances, you owe nearly $8,000 in credit card debt which grows each passing month. How can you fix that? You begin to think you are destined to live your life with this snowballing debt over your head.
The problem in these examples is that in each case, the goal seems so big that it may appear easier to do nothing.
The solution to this problem is to break down the big goal into much smaller, more manageable goals. Once you can shift your mindset, the goals don’t seem insurmountable. And when the goals don’t seem insurmountable, you can begin to make changes to tackle them – bit by bit.
Let’s take both examples above, and I’ll break down the big goals into smaller, more manageable pieces. Everyone’s situation will be different – and the way you break down big goals to smaller goals will vary by person. The objective is to find a way to mentally frame them such that you feel better about beginning to make progress towards meeting them, and if you meet all the small goals, that will ladder up to meeting the bigger goal.
The Wedding and Honeymoon
This example requires a couple to save $10,000 for the wedding and honeymoon in the next 6 months. The first way I would begin to reframe this is to break the total into the two parts: wedding and honeymoon. This couple needs $7,000 for the wedding and $3,000 for the honeymoon. Immediately, this isn’t a five-digit problem which makes the amounts seem slightly more manageable.
The $7,000 for the wedding needs to be saved over 6 months, but we can break that down to a smaller unit of time to ensure action. If you tell yourself that you have 6 months to save, you will quickly find yourself with only 5 months to save and little to show for the elapsed 30 days. Rather, we can take this figure to either a monthly, weekly, or daily amount – whichever incents the individual to take action. If we take this down to a weekly base, the couple needs to save about $270 per week. Depending on how the couple likes to work when it comes to finances, they could even take that a step further to say that each of them is responsible for saving $135 per week.
Now it is up to the individual to come up with that amount to save. And because they will know their status vs their goals on a weekly basis rather than just at the end of 6 months, they can review whether or not they are on track to meet their overall goal.
Skipping Friday Happy Hour after work may account for $40 towards this weekly goal.
Canceling their weekly Tuesday date night at new restaurants in town and, instead, deciding to cook a meal together, may add to $140 saved for the couple, or $70 per person towards this weekly goal.
The sum of those 3 simple changes is $135 per member of the couple, or $270 in total. If they can make these small sacrifices on a weekly basis – they will have paid for the $7,000 wedding by the time the big day rolls around.
The next part of this large $10,000 goal is the $3,000 for the honeymoon. Because 6 months is not an actionable timeline, the couple may choose to break this down to a daily target rather than weekly. $3,000 over 180 days comes to about $17 per day, or $8.50 per person. The couple can challenge each other to, at the end of each day, share how they saved their $8.50. This is a good way to hold each other accountable, but also share clever ideas and best practices since they are in this together.
Skipping a morning coffee and pastry at Starbucks may be a viable thing to forgo if that is a regular habit. That drive-thru stop would likely cover the $8.50 for the day.
Deciding to join (or start) a carpool to work may save the money on gas. If you live 25 miles from work and your car gets 20 miles per gallon – you’re spending $8.13 per day on gas (assuming $3.25 per gallon). If you can start a carpool where you drive only 1-2 days per week, you’ve managed to save nearly the required $8.50 per day the other 3-4 days.
If this couple makes these small lifestyle changes to address the more actionable timelines of daily and weekly for their savings goals, they should be on track to pay for the large wedding expenses in what seems to be a short amount of time.
The Credit Card Debt
One of the biggest problems with this example vs the wedding example is that there isn’t a time horizon to meet the goal. The debt will exist in perpetuity, so it’s easy to kick the can down the road and tell yourself that you’ll pay it down later. The challenge is that there will always be other things competing for priority in your personal finances, and deprioritizing paying down debt seems easy because there isn’t a hard deadline.
The first step for this individual would be to set a self-imposed deadline. For this example, let’s say the individual wants to eliminate their credit card debt in 2 years. Introducing that deadline allows for a mindset shift to occur. Now there is a deadline. And now you have to take action to meet your goal.
Using any of the available credit card debt repayment calculators online, we can plug in the $8,000 owed, the interest rate on the debt (I’m assuming 17% for this example), and the time period by which you want to pay off the debt (24 months). The output from this tool tells us that we would need to make $396 payments per month to meet our self-imposed timeline.
(It’s worth a slight sidebar to note that because of the high interest, this person will actually be paying about $9,500 to the credit card company over this time. Some of that $1,500 in interest could be avoided by doing balance transfers to lower APR credit cards or even finding a card that offers an introductory 0% APR. But I’ll not dive into that in detail here as that is slightly separate from the topic of breaking down big goals.)
To pay this $396 per month, you’ll need to find that money in your budget. For some, a monthly goal is sufficient, but as illustrated above, I like the idea of breaking that even further to a weekly or daily target. To come up with a weekly goal amount, we can calculate that we need about $92 per week. Daily, that figure becomes $13. Because the first example covered both a weekly and daily illustration, we can walk through this one on a monthly basis just to show a different angle.
One of the easiest places to start when thinking on a monthly cycle is bills – specifically monthly, recurring, discretionary bills.
I’d investigate the cable/internet bill. This is one of the easiest bills to have creep up without ever assessing the benefits you’re paying for. Perhaps you upgraded to faster internet but don’t really need it? Cutting the speed boost may save you $20 per month. Or that expanded cable package when you really don’t watch more than a few channels? Cutting those additional channels could save you $30 per month. What if you’re still paying for a landline only to receive telemarking calls? That could remove up to $40 per month depending on your package.
Gym memberships are also a good area to take an honest assessment. Perhaps you signed up in January for a New Year’s Resolution but haven’t been there since February. That $40 per month would account for 10% of the goal on a monthly basis.
Other common discretionary expenses may be things like Netflix or Hulu (or both?). It’s so easy to justify a small recurring charge because “It’s only $12 per month” – but that $12 is $12, and, in this example, would get you 3% of the way towards your total monthly goal.
An item to also investigate is your grocery shopping habits. Generally, food – specifically groceries – isn’t what more people would think of as “discretionary”, and I would agree. However, if you’re like me, you find yourself wasting food from time to time. If you find that you end up throwing away 10% of your grocery purchases (food expires, fruit rots, vegtables go bad, etc), and you’re spending $500 per month on your family’s groceries, shopping smarter may save you $50 per month. Beyond just food waste, you can also contemplate switching from name brands to private label/store brand products. If you assume that store brands are about 25% cheaper than name brands, and about 50% of your groceries have private label equivalents, making that switch could save around $60 per month on the same $500 per month grocery budget.
There is a laundry list of other areas to inspect for savings on a monthly basis as well, but I won’t go through every possible example, because every person has unique spending habits and different areas to inspect. Other areas to consider would be meals out, drinks at bars, fast food, snacks at convenience stores, reducing utility bills, “luxury” personal care (massages, pedicures, etc), movies, new clothes, new electronics… the list goes on and on.
The key is identifying spending you can reduce to meet your actionable, monthly goals. There are some items that you may be able to put on pause while you save to meet goals, and then resume once your personal goals are met. Examples of this may include: postponing a large purchase, temporarily reducing your charitable giving, temporarily canceling your TV service, etc. These are things that you plan to put money towards eventually, but you may be able to suspend for a period of time to meet your personal goals.
All in all, the key to tackling large, seemingly insurmountable financial goals is to start small and put yourself in a mindset where you can take action. Breaking down big goals into smaller parts is a big help in being able to mentally visualize what it takes to get there. A $10,000 goal can seem impossible. But a $100 per week goal for 24 months gives you something tangible to act against.
For some, weekly goals are best. Others may find value a daily challenge. Still others may look at their budget only on a monthly cycle, which makes monthly objectives fit best. It all depends on your personal mindset and what will work best for you and your family. Regardless of how you structure your smaller goals, break down the big ones into smaller chunks.
As they say, the best way to eat an elephant is one bite at a time.
Patrick’s Thoughts:
I completely agree with Eric’s analysis above on how to approach things in a right-sized approach. Sometimes, life throws a curve ball at us, and we need to find a way to solve for it. But that’s not always the case.
I think what Eric points out above is the reason for many problems in life seeming bigger than they are. We operate in such a “need this now” society that we often forget that life’s problems began the same way they are solved: one step at a time. We often let our problems creep up on us, and once they reach a certain threshold, we are in such a rush to resolve them immediately.
Instead of adding to Eric’s point above about how to “Break Down Big Goals,” I would like to take each of his two examples above and “Break Down Big Problems.” The wedding and honeymoon are certainly an exciting event, but I would imagine this couple had been dating a while before planning the big day. The same goes for the credit card debt. Unless there was one major purchase that resulted in $8,000 in debt, it most likely was accrued over many small purchases.
The Wedding and Honeymoon
While this is certainly an exciting event, I would argue the couple in this position should probably evaluate why they are in this financial situation in the first place. No one required them to choose a wedding date six months out: they chose it, and, as a result, created their first big problem. Now they are in a rush to figure out how they will pay for it.
Thankfully, Eric showcased some great ways they can approach it differently to accomplish their end objective. But what if they had chosen a different date for the wedding? What if they did a honeymoon six months after the big day? In today’s world, the social norms that bound generations of the past no longer apply. By taking a different approach to life, they could have another approach to talking this problem, and manage it in even smaller bite-sized quantities.
The Credit Card Debt
Sure, we all have the stories where our A/C unit breaks down and we are stuck with an unplanned $6,000 bill in the middle of the summer. In the Virginia heat, you can’t live long without your A/C unit. But I would venture to guess most credit card debt is racked up over time, not just from one major purchase. This is where I might propose a different approach.
While Eric points out some great ways to pay off the debt you have accrued, you haven’t necessarily solved the root of the problem: making a bunch of small purchases on your credit card over time that add up to a significant amount of debt. An additional step you need to take is look back at all the different purchases that resulted in that debt and begin identifying the areas you need to avoid in the future. Maybe you upgraded your wardrobe one month when you didn’t need to. Maybe you took a fun weekend trip just to get away. If you keep doing these things on a regular basis, all you’ll do is replace the current debt you’re paying off with new debt.
At the end of the day, all I’m trying to say is that you need to be looking both forward and backward when solving financial problems. Sure, you can create a great plan moving forward, but if you don’t solve the root cause of what got you there in the first place, you’ll never dig yourself out. While Eric is essentially saying that same thing above, I just wanted to frame it from a different point of reference so you can approach it the best way you see fit.
Thriving Millionaires 