I often work with clients who come to me frustrated, lamenting their lack of ability to stick to a budget or savings plan. Perhaps they’ve been trying for years to build up emergency savings or retirement funds, only to find themselves continuing to live paycheck to paycheck or building up debt to cover their expenses.
They share years of best-laid-plans, and they’ve even tried incorporating tools like budgeting software or spreadsheets. Perhaps they are not in real financial trouble yet, but they might be one unexpected expense away from it.
Do they simply lack will-power, grit, or the financial savvy to make it work? Generally, I think there are actually more significant factors at work. The two I see the most often are a repeated cycle of getting stuck in the planning phase, and people trying to force themselves into extremely rigid financial plans that leave no room for the flexibility required to approach an ever-changing life.
I went to college with a woman who would consolidate all of her assignments from every class she was in each semester into one massive, Pinterest-worthy, color-coded calendar. She seemed exceptionally well prepared for the semester, while I spent the semester shuffling through syllabi trying to figure out what was due that week. But as the semester wore on, I noticed that she rarely did any of the reading required for class, and frequently turned in assignments late. She spent hours planning and organizing the perfect semester, but the work never got done.
Planning has a certain allure. We can envision how awesome we are going to be at something without actually having to do it. It’s often more fun to plan and fantasize than it is to actually do the work our plan entails. Planning feels productive (and to a certain extent it can be), but it’s also a tactic we use to delay actually starting what’s likely to be a tough, habit-changing venture.
Lack of Flexibility
I’m a casual budgeter—the type who occasionally jots down my income and expenses on the back of a used envelope as I’m paying bills or planning for a big expenditure and trying to see what it would take to swing it financially. Sure, I’ve tried apps that track my spending, but it’s just not really my thing. I’ve actually never had a spreadsheet that shows down to the last detail what I’m going to spend and where because that’s never been very helpful for me. But I could also tell you how much money I have, where it’s coming from, and where it’s going because I interact with it and pay attention to it regularly.
Really rigid structures work well for some people, but they aren’t for everyone, and they don’t work well for me. Typically, the more rigid a plan is, the more likely it is to make me feel like a failure, and the end result is that I lose my momentum to keep going. In fact, the more spreadsheet-oriented and rule-bound my finances become, the more likely I am to work against, rather than towards my goals.
Is There Another Way?
For me, the most impactful thing I ever did for myself financially was developing an question that forced me to evaluate the trade offs I was making in even the smallest decisions. It also keeps me present in my financial goals, creating a reason for me to think about them multiple times each day. “Is _____________ more important than ___________?” I push myself to ask this question before making any decision about how to spend my time, my money, or my energy.
- Is ordering pizza tonight more important than taking a vacation this spring?
- Is checking Facebook more important than getting 7 hours of sleep tonight?
- Is financial security more important than flexibility and freedom in the work that I do?
- Is taking a nap more important than going for a walk?
- Is owning a luxury car today more important than being able to retire at 55?
There isn’t necessarily a right answer to these questions. In fact, depending on the day, the answer to the same question might be different. If I feel like I might be coming down with the flu or I only got a few hours of sleep the night before, a nap might be way more important than going for a walk. But if I’m just feeling a little worn out from a long day at work, a walk is going to win out for me.
It’s not about being right, it’s about evaluating, every time you make a decision, what you’re giving up by making that decision. Is it worth it?
Your time, your energy, and your money aren’t things that are happening around you or to you. Instead, they are things you are actively making decisions about all the time. It doesn’t require a spreadsheet or a color-coded calendar telling you when your assignments are due, but it does put you in the thick of it, on good days and bad, and forces you to replace the auto pilot of old habits with a conscious choice-making activity about where you are spending your most valuable resources.
Most of us are aware that a sneaky set of psychological biases can trip us up when it comes to investing and managing our money. And some of these biases seem tailor-made to foil retirement savers. Prudential Retirement, an arm of the insurance giant that administers 401(k) plans, surveyed plan participants in 2017 to see which behavioral challenges troubled them the most. Here’s what the survey found.
Longevity disconnect. Although no one is eager to meet the Grim Reaper, a lot of us think we’re not going to live as long as we probably will. That’s a problem when you’re funding a longer-than-expected retirement. For 39% of those taking Prudential’s quiz, failing to see far enough into their senior years posed the biggest behavioral challenge to achieving financial security. Realistically, unless there is strong evidence to suggest otherwise, it’s wise to plan to live into your 90s in retirement, and to test any retirement plan against the possibility that you may live even longer than that.
Procrastination. More than one-fourth of the savers surveyed turned out to be put-it-off-until-later types. But when it comes to investing, squandering time is a huge mistake. On the other hand, investing early and often, is a boost to retirement due to the nature of compound investment returns. Programs that enroll employees automatically in retirement savings plans are a boon for procrastinators; and many plans let you escalate contributions automatically, too. If proactively saving for retirement is not your style, using tools that will automate this saving can be a huge boost to something you would otherwise just keep putting off.
Optimism. Some 22% of savers suffered most from rose-colored-glasses syndrome. Believing that everything will all work out in the end may be good for your blood pressure, but it’s actually a terrible savings strategy. Plan for inevitable bumps in the road, which can range from the catastrophic—being struck by serious illness, for example—to the merely disappointing—say, a missed promotion. Having enough money in the bank to pay for unanticipated expenses keeps you from having to build up credit card debt or dip into retirement savings before you are ready.
Questionable Investment Strategy. Determining the best investment mix for your stage in life and your risk tolerance is a challenge. Sticking to the plan when the market is volatile requires fortitude. Prudential found that 8% of savers were most led astray by being herd-followers, or making the wrong investment choices for themselves because they didn’t know how to pick appropriate investments for themselves and didn’t know who to ask for advice. Regular portfolio rebalancing can keep your assets on target; a written investment policy can help you stick to your guns. Often, 401(k) plans have advisors who can help you make the best decisions for your situation, or you can find a financial planner outside of your work that you trust to advise you on these decisions.
Instant gratification. Would you wait a year for $1,000 rather than receive $500 today? How are you with impulse spending? Most people who took Prudential’s quiz said that waiting, either for a higher return or to make a purchase, wasn’t a big deal; only 5% revealed it as their major issue. But research published by the National Bureau of Economic Research (NBER) in 2016 found that more than half (55%) of retirement savers suffered from “present bias”— a wonky term for wanting instant gratification. If you need a nudge, try a budgeting app or a commitment to cash-only spending to curb purchases you may regret. Or try asking yourself when you are making non-essential purchases whether what you’re buying now is worth having to work an extra year before achieving retirement or another long-term savings goal.
The NBER research found another foible that keeps people from saving as much as they should: Nearly seven in 10 retirement savers misunderstood how account balances increase over time, underestimating the exponential growth of compound returns and, therefore, investing less than they otherwise would. In other words, a lot of people aren’t saving enough because they simply don’t realize how much money they’re leaving on the table.
Are you ready to give up aimless wandering towards uncertain financial ends, but frustrated with the endless cycle of setting financial goals that you constantly seem to abandon? You’re not alone. Recent research suggests that for many, our societal obsession with goal setting and goal achievement is leaving most of us feeling disappointed, frustrated, and unmotivated to continue working towards the life we want. However, there are some things we can do as we set savings targets that can significantly increase the likelihood of reaching our financial goals.
Targets vs. Goals
Before we get too far into this post, I want to distinguish between the goals we discussed in the previous post, and what I generally like to call savings “targets.” These targets aren’t goals, they’re a part of a plan we’re using to accomplish our goals. For example, saving an extra $500 a month is not a goal unto itself; it’s a target that’s part of a strategic plan to be able to afford an experience or possession at some point in the future. The goal might be retiring at 55, or buying a house in five years or taking a year off to stay at home with your new baby. That $500 a month is just a target you are using to help you achieve the goal.
Targets that Don’t Work for Us
It turns out that when it comes to our finances, we struggle to set effective targets for one of two major reasons:
- They don’t realistically set us up for success in achieving our goal, or
- They are way too difficult for us to reasonably achieve without sacrificing a lot of other things that we consider valuable. So, we quickly give up on them.
To illustrate, let’s say that I want to see the Grand Canyon, and I decide to get there by driving 30 minutes a day from my home in Olympia, in the direction of the Grand Canyon. I’m making a little progress every day, but this target of driving 30 minutes a day will probably not actually effectively help me reach my goal. After six days, I’ll still be in the state of Washington. At that point, I’ll likely feel like I’m getting nowhere towards accomplishing my goal, decide I can’t do it, and give up on it. I guess I wasn’t meant to see the Grand Canyon after all.
On the other hand, let’s say that after consulting Google Maps I determine the Grand Canyon is a 19 hour drive from my house. I decide I’ll drive to the Grand Canyon in one day, because a day has 24 hours in it. If all goes according to plan, I’ll have 5 hours to spare. I have a three-day weekend coming up, so I’ll drive down on Friday, spend a day at the Grand Canyon Saturday, and drive back on Sunday. Back to work on Monday. That works, right?
Those travel plans may sound absurd to anyone who has ever planned a trip. Yet we frequently do this with goals that involve money. Most people live in an endless cycle of setting and abandoning savings targets because we either feel like they are getting us nowhere, or they’re way too difficult to realistically achieve. For example, saving $200 a month toward a down payment on a $300,000 home is likely to leave you extremely disappointed when, after five years of saving, you’ve only saved enough to make a 4% down payment. On the other hand, if you’ve done the math, and determined that an appropriate savings target is $1000 a month to get that house you want, but your take home pay is $2000 a month, you’re likely to find yourself quickly frustrated at your inability to meet your savings goal.
Setting Targets that Work For Us
What can we do to ensure that our targets don’t end up leaving us feeling hopeless and frustrated?
First, make sure targets are realistic in terms of 1) What is actually needed to achieve the goal, AND 2) What you can reasonably contribute toward the goal. In order to do this, I recommend keeping three things in mind as you develop savings targets to meet your financial goals.
- Know what you’re aiming for. If my goal is to retire at 55, or buy a three bedroom house in five years, or put both of my kids through college, I need to know approximately how much money it will take to do that, and how long I have to accumulate that. If I don’t, I could keep diligently saving a little bit every month, only to realize in five years, I have nowhere near enough to put a down payment on that house I really want.
- Know your limitations. If you realize you’ll need to save $3000 each month to be able to retire at 55, but your take home pay is $4000 a month, setting a savings goal that out of reach will almost certainly result in disappointment and quick failure. This is likely to leave you discouraged about saving at all. Even though the problem is the opposite of setting a target that’s too low, it leaves you with the same feeling–that accomplishing your goals is impossible, that you’ll never get there. Instead, if meeting your goal on your desired time frame isn’t within your earning and savings capacity, and you don’t have a clear plan for increasing that capacity, it may be time to re-evaluate the goal to make either the timeline or the cost more realistic.
- Use ranges for both goals and targets. One way to navigate the “too hard” vs. “too easy” target is to incorporate target ranges, rather than specific numbers. Research has shown that setting a goal range is actually a more effective way to set and achieve goals and targets then having a single number in mind. The attainability of the low end of the target keeps us from getting discouraged, while the high end motivates us to keep working on our goal, even after we’ve met the lower threshold we’ve set for ourselves.
A range also provides for flexibility that a specific number does not. If instead of $500 a month, I set a goal to save $300-$700 a month, then in months where I have unexpected expenses come up, I can still aim to meet my low threshold and keep my momentum going so I’m not tempted to quit. And in months where my earnings may be higher than normal (from a bonus or a tax refund), I’ll be able to put more money towards the higher end of my target. In this way, I’m more likely to stay engaged in the goal, and the targets I’ve designed to get me there, regardless of the circumstances that change around it.
It often makes sense to “pair up” your target ranges with goal ranges. If you want to retire 20 to 25 years from now, then make the low and high end of your savings target correspond to that range. That way you stay motivated to keep working towards the high end of your goal, even after you’ve met the low end because it means you’ll get to retire earlier.
Financial goals have to work for us, both now and in the future. That’s why we started with flexible goals in the first place, and it’s also why incorporating realistic targets (preferably target ranges) is an important step on the path to getting what we want. I encourage you to sit down with each and every one of the flexible goals you’ve written down for your financial future. What will it cost to fund them? On what timeline is it reasonable for you to save that much? Will it require a change in your income producing capacity or spending habits? Now is a time when goals may start to sort and prioritize themselves in terms of both when you want to accomplish them, and which ones you want to fund first. Let that process happen. It will give you a clearer picture of what is really important to you when it comes to money.
Finally, don’t think that we’re done with this yet. Targets are the intermediate step between our goals and the systems that turn dreams into realities. Systems are the most important thing you can actually create and change in your life to not just plan for, but to achieve the life you want. So, stay tuned for that in our next episode of Planning for the Life You Want, where we explore how to create the systems that help us meet our targets and turn our goals into realities.
This is the second post in the series: Planning for the Life You Want