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Using Difficult Financial Stretches as a Metric for Measuring Progress

Using Difficult Financial Stretches as a Metric for Measuring Progress

Back when I was teaching, I used to have a lot of conversations with high school students about how we show up on our “worse than average” days as being far more important to the general trajectory of our lives than how we show up on our “better than average” days. That if they wanted to make substantial and significant changes in their lives, to their wellbeing and their success (however they chose to define it), that their energy would be best spent thinking about how to make small, incremental improvements to the 50% of days that were below the median.

Why?

It’s relatively easy for most of us to show up on our “better than average” days—to do what we need to do to progress. On the best of those days we might be hitting figurative home runs, and on the just slightly “better than average” days, we might just be getting on base because we got hit by a pitch. But hey, we’re still on base, making progress in meaningful ways towards a life that we want.  

Then there are the days that ask a lot of us. And the truth is – financial days and financial stretches are no different. We will have days where it feels like the world has been generous with us and we are making great financial decisions effortlessly, and days when it feels like everything bad that can happen has happened to us, including some of the financial decisions we’ve made. And we will likely have a lot of ho-hum days in between.

And while I’ve talked about strategies for coping with and getting through the worst of these financial seasons in the post Getting Through A Money Slump, the topic of this post is a bit different. I want to talk about using our slumps as metrics of our progress. Because if we’re going to place a high value on improving the “worse than average” 50% of our financial days, we ought to have some way to acknowledge our progress.

The Problem with Best Day Metrics:

I love things that I’ve learned how to do as an adult because I have a much clearer memory of the trajectory of my progress. Skiing, golfing, playing guitar – these are all things I’m quite average at now, but I remember being quite bad at them. And unlike things I learned to do as a kid, I have a good memory of my learning curve and critical points along its path, including all those highs that came when I accomplished something that had at one time felt impossible.

Best day metrics are relative, depending on skill level, but I can clearly remember the first time I broke 110, or 100, or 90 on the golf course, the first (and, so far, only) time that I skied down a run with a black diamond on its sign, the first time I played a song all the way through with no mistakes on my guitar. It was a rush, a total high, and a pretty good recipe for a let-down because it usually brought with it the expectation that this was the new normal, creating a wildly unrealistic metric for the average and bad days that would follow.

Best days make good metrics for future best days. They make terrible metrics for the other kinds of days. It’s no different with money.

Consider this situation:

You’ve been working hard to manage your money and seeing incremental progress, saving each month and building up your emergency fund. You’ve almost hit your goal of $10,000. Then, you happen to coast through an inexpensive month with no unexpected bills, and you also get a bigger than expected tax refund. Then another month goes by, similarly, no major unexpected expenses. For the first time ever, in your whole life, you now have a $10,000 emergency fund—something that at one point felt like an impossible goal to achieve. Suddenly, everything feels like it’s starting to work for you, and you’re feeling great about your money management and all the hard work you’ve put into getting here.

But then, your water heater and your transmission go out the next month, $10,000 walks out the door, and your savings account is empty. And maybe nothing at all has actually changed about how you’re managing money (or maybe because you were tired and frustrated you did some online shopping and got some takeout, adding a little insult to life’s financial injury). But emotionally, you’re crashing—you were feeling so good you accidently created a new normal out of a best-day metric and now things feel really bad. In that moment it might even feel worse than if you had $10,000 of expenses come up and no money in your savings account, because at least then, you would have continued to believe that hitting that $10,000 goal was impossible.

And even though we instinctively can’t help but make that comparison… it’s a bit like comparing your personal deadlift record to the amount you can deadlift when you have the flu.

It doesn’t really make any sense.

The Case for Bad Day Metrics:

Bad days and how you progress through them are worth noticing. They will often tell you more about your financial progress than your best day metrics, AND without all the unrealistic expectations that best day metrics create.

Let’s go back to the scenario where your water heater and your transmission go out in the same month and that emergency savings account you had worked so hard to accumulate is back down to $0.

If you stop comparing that scenario to your recent best-day stretch, and instead think back to 2 years ago, when the only option you would have had to cover $10,000 of unexpected expenses would have been to put it on a credit card, you can suddenly see that you have made a substantial amount of progress in this area.  At one time this scenario would have been a financial crisis, whereas now, while it feels like a really crappy punch in the gut, it is actually an incredible marker of the progress you’ve made.  

If you’re having a hard time managing cash flow this month because of bad circumstances or impulsive decisions, but that just means you didn’t make a contribution to your savings, and 2 years ago it would have meant dollars onto credit cards, that’s a big deal.

And the truth is, we don’t generally need a reason to carry on and keep up the good habits we’ve worked so hard to develop on our best days. The best days are, in and of themselves, quite rewarding and motivate us to keep going. But for most of us, to keep from dropping into the depths of despair, we need a way to measure progress on our worst days, to put them into perspective, to remind ourselves of how far we’ve come, and the only way to do that is to compare our worst days to your previous worst days. Our worst day metrics can tell us a lot about our progress at a time when we need to hear it the most.

Setting Realistic Expectations for Good Day Metrics:

I want to be clear, I think there’s a place for best day metrics, they tell us something about our highest potential to achieve (in a given moment), but we over assign value to them, often to the detriment of our progress. It’s not actually motivating to most people to feel defeated or less than what we are capable of being (I do want to acknowledge that for a small, fairly vocal, group of people this actually can feel motivating, but for many, it’s actually highly demotivating).

So, if we take our best day metrics, and overgeneralize them to our average and worst days, for many people, it ends up creating a sort of self-defeating space, where a bad day tested against a good day metric takes us into the headspace that looks something like:

Well, I guess I’m not any good at this after all. It was too good to be true to think I could stay on budget and have an emergency fund. This is always just going to be a struggle and I’m never going to be any good with my money, and I guess I’ll go back to my old financial ways because at least I was having more fun then.

So, it is important to have some bad day metrics to compare those inevitable bad days against to avoid this type of spiraling.

But, for those of us who are reasonably average at many things (and most of us are) with effort and time, good day metrics can and often do become average day and sometimes even bad day metrics, we just can’t expect them to be right way.

The first time I broke 100 on the golf course, the problem wasn’t in thinking that I was a golfer who could break 100, the problem was in thinking I was a golfer who was going to break 100 all the time from there on out. The truth is it took me almost a year to get back to that score – A YEAR. And it was one of the most frustrating and least fun years of golf that I have ever played, because every time I went out thinking I could break 100, and every time it didn’t quite happen, and I left quite discouraged. But now, 100 is a “worse than average” day metric for me on the golf course (and yes, for those of you who play a lot of golf with a high level of skill, you’re correct in thinking I’m still not that good of a golfer). And the fact that 100 is a bad day metric but it used to be a good day metric is a useful thing to remind myself of when I’m starting to feel frustrated.

Good day metrics have their place, and it’s fun to historically compare their peaks, but if you put them into the wrong place, you really risk a level of discouragement that can be crippling to progress. And your money trajectory is too important to let it fail because you used the wrong benchmark to compare yourself to on a bad day.

So go back and make yourself a list of those financial low points in life and remember to pull it out when you’re having a bad financial stretch. Maybe 5 years ago it was credit card debt you used to bail yourself out of a jam, then 3 years ago you had to spend down every last dollar of your savings account, and today, when a major unexpected expense came up, you still had $1000 dollars left over, and that’s substantial progress, even if no one is giving out trophies for incremental improvements on our worst days.

It’s natural for all of us to want to live up to our peaks all the time, but it’s important to realize when that’s actually getting in the way of our progress rather than propelling us forward to new heights. In those times, it’s critical to find a piece of information, a realistic metric, that allows us to take the next smallest step forward when we’re feeling discouraged, unmotivated, or disappointed.

Is Washington’s New Roth Deferred Comp Option Right for You?

Is Washington’s New Roth Deferred Comp Option Right for You?

This fall, WA State Department of Retirement systems will be rolling out an option to make elective deferrals to retirement savings accounts (aka Deferred Comp, DCP, or 457(b) accounts) as after-tax, Roth contributions.

Prior to this, state employees and others served by the DRS Deferred Compensation Retirement plan have been limited to pre-tax (aka as traditional or tax-deferred) contributions to their retirement plans, and the change has many asking if they should utilize the Roth option or continue with their traditional contributions.

For a brief review of account types: traditional contributions are made pre-tax (so you don’t pay income taxes now). They are invested and are only taxed when you take account distributions in retirement. But when you do take distributions, you’ll pay income tax on both the original contribution amounts as well as the investment earnings. Traditional contributions are a great way to lower your current taxable income, but they aren’t tax free. They just defer your taxes to a later point in time.

Roth Contributions are made after tax, which means they don’t lower your current taxable income. But once the contributions are made, they are allowed to grow tax free from that point on until you access them in retirement. When distributions are taken from a Roth account, you don’t have to pay taxes on the distribution, so the investment growth is essentially yours, tax-free.

While there is no single right answer to the Roth vs. Traditional contribution question, there are steps to work through when trying to decide if the new Roth Deferred Comp option is right for you:

1

Establish a rough estimate of your post-retirement income and determine whether it will represent a change in tax-brackets.

1

Establish a rough estimate of your post-retirement income and determine whether it will represent a change in tax-brackets.

Most people served by the state administered DCP program will also receive a Plan 2 or 3 Pension, Social Security (with the exception of those served by the LEOFF program, many of whom are exempt from Social Security), and possibly funds from a Plan 3 TAP Annuity. The combination of these funds means that you will likely have a fairly steady source of taxable income in retirement. It’s a good idea to start by trying to anticipate how much, and if it will adjust/change your tax bracket at all.

A tax-rate calculator can help you get a sense of what income tax bracket you might be in at retirement so that you can compare it to your current tax bracket. If you’re not sure what your current tax bracket is, these days, when you finish preparing your taxes (or get them back from your tax preparer), they typically come with a summary comparison sheet for the last 3 years at the front of the document. At the bottom of that comparison sheet, you’ll be able to find your marginal tax rate to compare it to the projected marginal tax rate shown on the calculator above.

If your tax bracket looks like it will be drastically lower in retirement – that bodes well for favoring traditional, pre-tax contributions, when possible. But for many teachers, state workers, and other public servants who are also good retirement savers, it’s quite possible that your tax bracket may be equivalent to, or in some cases even higher, in retirement. And if it looks equivalent (and none of the other considerations below apply) it’s a good idea to consider using a Roth contribution method for at least half of your ongoing retirement savings. That being said, item 2 below might point you in the direction of directing an even higher percentage to Roth contributions, while item 3 might actually suggest it’s a good idea to wait a few years before starting to make retirement contributions as Roth contributions.

2

Determine how much tax-deferred savings you already have, and how that will impact your future, taxable income.

2

Determine how much tax-deferred savings you already have, and how that will impact your future, taxable income.

As I mentioned in this article on teachers who may have too much tax-deferred savings, it’s a real possibility for someone who has worked in a state or teaching job and who has saved aggressively for retirement to create a situation where, once Required Minimum Distributions begin, they are catapulted into a significantly higher tax bracket in retirement than they’ve ever been in before.

At that time, for teachers, I recommended considering a Roth 403(b) as a potential alternative savings method, but there really wasn’t a good alternative for state employees. The good news is that with the state’s adoption of the Roth DCP plan, teachers and all others served by DRS and the state DCP plan will now have the option to make some or all of their retirement savings Roth contributions, for many, eliminating the need to go the 403(b) route at all.

A great way to determine how impacted you might be by this phenomenon is to use an RMD Projection Calculator. This will allow you to see how much you will be required to start taking in Required Minimum Distributions in your early to mid-70s. You can add this to the taxable income you’ve calculated above in the tax bracket calculator and see how it impacts your tax bracket. If it looks like the existing savings you have is going to produce substantially more in RMDs than you need, and will drive your tax bracket up even farther, it’s worth considering a full switch to Roth contributions as soon as possible (provided you won’t be significantly impacted by the issues in point 3).

3

Determine whether increasing your taxable income now will have any unintended, drastic consequences on your tax deductions or credits.

3

Determine whether increasing your taxable income now will have any unintended, drastic consequences on your tax deductions or credits.

All other things being equal, I tend to favor Roth Contributions as at least an equal portion of retirement savings for most people, unless they are in a marginal tax-bracket higher than 30% currently, or they have a good reason to believe they’ll be in something like the 10-12% tax bracket through most of their retirement. If we pull financial planning out of the hypothetical spreadsheet world and look at it in real terms of real people retiring, I’ve rarely met a retiree who regretted the amount of Roth contributions they made along the way, while many are overwhelmed by the tax implications of large tax-deferred retirement accounts. The truth is, when you’re making money, paying taxes is a pain, but it’s not a source of great anguish for most people. But in retirement, when income is fixed and you’re no longer adding to your investments, bigger than normal tax bills can actually be a source of great mental stress for many retirees because they see the taxes they have to pay pulling from a fixed pot of income that they are not replenishing each year with a salary.

That being said, there are certain situations where your Taxable or Adjusted Gross Income may be just barely qualifying you for a lot of tax breaks (in addition to a generally lower tax rate) that you wouldn’t get if you suddenly started to show even a little bit higher Adjusted Gross or Taxable Income. This is a particularly relevant consideration when you’re getting big tax breaks related to your kids (for childcare, higher education expenses, etc.).

While the details of each of these are too much to get into here (these types of tax breaks phase out at all different income levels, so unfortunately there is no succinct way to explore them all), suffice it to say that it’s worth discussing with your tax-preparer or financial planner the consequences (and potential lost tax-advantages) if you’ve been making fairly substantial pre-tax contributions and suddenly start making those as Roth contributions. Besides just paying taxes on more income, are there other major advantages you might be missing out on if you make this switch from traditional to Roth contributions?

What Else Do You Need to Think About when Switching to Roth Contributions?

Once you’ve decided to make the switch, there are a few things that you may have questions about, or that you’ll want to keep in mind going forward.

1

If you’re switching from pre-tax to Roth contributions, but plan to contribute the same percentage or dollar amount as before, you’ll see a smaller paycheck due to the taxes taken out.

1

If you’re switching from pre-tax to Roth contributions, but plan to contribute the same percentage or dollar amount as before, you’ll see a smaller paycheck due to the taxes taken out.

For example, if you were making a $1000 per month contribution to a traditional DCP account before, and you decide to make that $1000 contribution to a Roth DCP account going forward, they’ll still only take out $1000 for the contribution, but they’ll have to withhold taxes on the contribution amount, since taxes will be owed this year. Depending on your tax bracket, you could anticipate that your monthly take-home pay on a $1000 contribution might be $100-$300 lower to account for this additional amount you have to pay in taxes now.

2

The total contribution limit hasn’t changed.

3

There is no income limit for Roth DCP contributions like there is for Roth IRA contributions.

2

The total contribution limit hasn’t changed.

In 2023, you can still make a total DCP Contribution of $22,500 (or $30,000 if you are 50 and older). Whether it’s all Traditional, all Roth, or a combination of both, this is still the maximum total amount you are allowed to contribute to DCP per year.

3

There is no income limit for Roth DCP contributions like there is for Roth IRA contributions.

This is a question I receive a lot, and it’s a great point to be aware of. For many folks who have been phased out of their ability to make traditional Roth IRA contributions due to the income limitations, it’s important to realize that these income limitations do not apply to Roth DCP contributions. So, income levels are worth considering because they impact tax brackets, but there’s no point at which you won’t be allowed to make Roth contributions to your Deferred Comp account should you want to do so.

Without knowing exactly what the future brings in terms of income, tax-brackets, and investment growth, it’s hard to know with 100% precision whether Roth Contributions will be the right call for you going forward. That being said, by considering all of the factors above, and working with your financial planning or tax professional, you’ll be able to make a reasonably educated guess about whether you want to take advantage of this new Roth Contribution option being offered by WA State Department of Retirement Systems.

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How much rent or house payment can you afford?

How Much Rent or House Payment Can You Afford?

This is a question I get frequently from clients, and there’s unfortunately no “one-size fits all” answer to this question. However, whether you’re considering rent or a mortgage payment, there are some key financial metrics and guidelines that can help you make this decision.

Conventional Rules of Thumb for Monthly Housing Costs

Most conventional recommendations advise limiting your total monthly cost of housing to 28% of your gross (before-tax) monthly income. So, for example, if your gross pay is $7000 per month, you’d be wise to shoot for a maximum housing allowance of about $1,960 per month for a rent or mortgage payment. And while this is a good rule of thumb to consider, there are other factors that may be at play in your personal financial situation that you want to take under advisement as well.

When considering the 28% recommendation for housing – look at how it factors into your other key financial ratios:

50/30/20 Ratio (For Renters and Home Buyers)

The 50/30/20 Ratio states that, as a general rule, 50% of your take-home income should be spent on non-negotiable needs (Rent or mortgage, utilities, groceries, insurance, and minimum debt payments), 30% on wants (Shopping, eating out, happy hour, concerts or sporting events), and 20% should go to savings, or to making additional debt payments if you are trying to get out of credit card or other non-secured debt. So, in the example above, if your $7000 monthly gross income results in $5,600 in monthly take-home pay, you would be wise to not exceed $2,800 per month in spending for necessities. And if the $1,960 per month that you’re spending on rent or a mortgage pushes you over that limit, you may want to reconsider whether it’s financially feasible for you to take on that payment or whether you need to look for a lower-cost housing option.

Overall Debt to Income Ratio (For Home Buyers)

Your total Debt to Income Ratio basically demonstrates to lenders what percentage of your total monthly income is going to pay off existing debts and is an important factor to consider if you are thinking of purchasing a home. Typically, a good or ideal debt to income ratio will have no more than 35% of your gross monthly income being spent on repaying debt (including the mortgage payment you’re intending to take on). So continuing with our example, if you were making a gross income of $7000 per month, ideally no more than $2,450 of that would be spent on paying down debt. That means that in order to afford your $1,960 per month mortgage payment, you’d need to have less that $490 in other monthly debt payments.

Don’t Neglect the Cost of Your Escrow Payment, Increased Utilities and HOA Fees

For first-time home purchasers, a major source of monthly-payment shock can come in the form of what you pay monthly to cover your escrow account payments. This amount essentially goes into an account that your property taxes and homeowner’s insurance are paid from. Because property taxes vary so widely, it’s hard to give an exact prediction of what this amount will be, but you can anticipate that it will typically be at least several hundred dollars, if not more in higher priced housing areas. When working with a lender on pre-approval, make sure they provide you with total monthly costs including escrow for different purchase amounts, and make sure to take that into consideration when evaluating the total cost of housing as part of your 50/30/20 Ratio. Utility costs often increase for homeowners as well because certain utility payments are factored into the cost of rent that will have to be paid separately when you own a home. And for condo purchasers, it’s also important to factor in the cost of monthly HOA dues.

Can You Cut Back Other Expenses to Commit to a Bigger House or Rent Payment?

If you were my client, I would advise against this as a plan without testing it first. If you were insistent and committed to it, I’d ask you to prove it to me. Prove to me that you can sustainably cut expenses elsewhere before you commit to a 30-year monthly payment on a home that exceeds recommended ratios. And the catch is, you can’t take it out of the 20% savings category. If you’re confident that you can reduce your “wants” spending to say, 15% so that you can afford more in the needs category, spend a year doing that before you commit to doing it for 30 years. And take that opportunity to save that extra 15%. After all, you’re about to embark on a purchase that will inevitably require a bigger buffer savings account than you needed when you were renting, so you might as well start now.

But if you’re already having a hard time meeting your 20% savings goal with your current monthly expenses or have already accumulated some credit card debt because you overspend monthly or when things come up, you are fooling yourself if you think that suddenly buying a home that increases both your monthly expenses AND your potential unexpected expenses for large-ticket items is going to fix this. It will not, no matter how alluring the idea of home-ownership is.

What If You Live in a Place with a Very High Cost of Living

This is very much a reality for many folks, and I’m not naïve to how variable housing costs are in different areas of the country. That being said, I think it’s important to have the conversation about the tradeoffs that come with being a lower-income earner in very high cost of living areas. Long-term, it is likely not going to be a sustainable way to live unless you are 1) actively pursuing a way to make more money, or 2) willing to explore alternative options for housing, like living with or renting to roommates, or possibly renting or purchasing a very small space. All of these are viable options, but otherwise, it just doesn’t compute. It’s not ever going to get easier to make ends meet living in an area where you can’t afford the cost of living unless you have a plan to either make more money or find creative ways to spend less. High cost of living areas are often filled with opportunities to make higher salaries, but if you are not pursuing those opportunities and are not willing to reconsider where you live, you may need to reconsider how you live and who you live with in order to make the available housing options affordable to you.

At the end of the day, there really is no one right way to do this. No exact rule that can answer this question for you. But ultimately, I’ve seen far too many people try and make high-cost housing options work that end in nothing but financial heartbreak and frustration. Keeping your housing choices within the realm of what you can afford is extremely important for your long-term financial health, and it also factors into preserving the life you want to live today (after all, for most people it’s a big tradeoff to let go of all their “wants” spending simply to buy the house they want… especially when considering how long the commitment to a mortgage is). But above all, I encourage you to avoid the trap of thinking you can make something work if you haven’t taken the time to prove to yourself that you can sustainably live on what’s left over after you’ve taken on the bigger mortgage or rent payment. That’s something to test before you make a life-changing financial decision, not after.

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What’s driving your impulse spending?

What’s Driving Your Impulse Spending?

Let’s face it. When it comes to spending, 99% of us are making choices that involve tradeoffs. More money spent today means less to save for the future. And even if we just consider the tradeoffs in our current lifestyle, more money spent in one category of our budget means less that’s available for another.

In one of the earliest Sustain Financial blog posts, I talk about using a question to help us evaluate these tradeoffs: In this more important than…? But in this post, I want to explore another tool or strategy to help you on the path to making more consistently aligned spending decisions: taking the time to think about what the underlying feeling is that’s driving your impulse to spend.

To make any of these strategies really work, the first thing to recognize is just how much of our spending is a choice. That’s not a criticism of unnecessary spending. I, too, enjoy spending money on things that are wants rather than needs. But many of the “essential” items on our lists: expensive groceries rather than budget-conscious groceries, cable and streaming services, new clothes, new phones, etc. are not exactly the necessities we sometimes make them out to be. That doesn’t mean it is easy or comfortable to get rid of them. But if we really are honest about what our families need to survive, it’s basic foods that can be prepared with inexpensive staples, a roof over our heads, clothes on our bodies (old clothes will do) and not a whole lot more. So, everything else is really a choice we’re making about what to spend money on.

And while it helps to weigh that choice in terms of whether it’s more important than another option or choice, sometimes if there’s a really pressing feeling under that impulse to spend, just asking the “is this more important than…?” question may not be enough to override that impulse.

This may seem overly simplistic, but I think a few concrete examples may be a good way to illustrate how there is often a lot more to this question than what meets the eye.

So, a great series of follow up questions are… 

“What’s the underlying need
that’s driving this decision?

Will this spending even actually
meet that need?

Is there another way to meet it
that won’t blow my budget?”

The examples I’m going to explore here are:

1) The need to buy a new item for your home

(decoration, piece of furniture, storage containers, lawn chairs etc.)

2) Unplanned eating out

In my work with people around budgeting I find these two categories are really common places where people don’t plan for a lot of spending and often end up consistently over-budget. Which means that they are likely a place that a lot of unplanned, impulsive spending happens.

Let’s start with that new item for the home.

These purchases can seem like innocuously small things, often bought with no real forethought, but whose accumulation over time really adds up. The thought that goes into purchasing them is often something like, Wouldn’t that look nice or be nice to have in the house or yard, and it’s only $30. But then it’s $30 here and $20 there, and pretty soon it’s several hundred dollars in a month that you hadn’t planned on spending.

So, what would it look like to dig into what’s behind that spending desire. Really common underlying forces in this type of decision are a feeling that this item can fix or make you feel better about something you’re not fully satisfied with in your living environment or your life. Boredom with your current home environment, clutter, or jobs that need to be done around the house that you don’t really want to do, are all common reasons we seek to add something to our living environment. No matter what it is, it’s really important that you clearly identify the current problem with your home or your life that you think this purchase will fix. If I’m tempted to buy new plants or outdoor furniture, but when I really think about it, my yard has a ton of weeds in it. The plants and the furniture are a distraction. I should probably head home from Target (or get off Amazon) and start pulling some weeds.

If the current problem is a lack of seating, and you’ve landed on a $500 chair that you really can’t afford right now, then the next question would be, is there a way to fix the problem with a less expensive solution? But it’s highly probable that the need you’re trying to fill may not actually be quite so directly linked. For example, you may be feeling bored with your home. It might be that your house doesn’t look how you want it to – and rather than cleaning it, or sorting, organizing and donating items you don’t need any more to reduce the clutter that’s actually underlying your dissatisfaction, it’s easier to just simply buy an item that will add a little novelty for a little while until it, too, eventually becomes something you are bored with and/or adds to the clutter.

It may be that you’re missing backyard parties with friends or camping with family, so buying a new cooler or lawn chairs might make you feel excited about that being a part of your life again. It’s not that the cause will be the same for everyone, but rather, that it’s extremely important to identify the cause to evaluate whether the purchase you’re about to make will alleviate your underlying feeling of boredom, dissatisfaction, etc. for more than a few hours or a couple of days. And it will give you an opportunity to think about what will alleviate that feeling if this impulse purchase will not. Is there something you can clean, re-arrange, organize, donate, etc., or can you start planning the next camping trip or backyard barbecue? All of those are much more likely to create a more lasting impact on that underlying feeling than buying that item will.

Eating out, particularly unplanned eating out, is a trickier example, since it’s typically linked to hunger, and food is a basic human need

But like the $500 chair, it is a good example of where there are opportunities to assess whether the trip to McDonald’s, the café next to your work, or the local taco truck are really the only ways to address your underlying need.

The “underlying need” question is not really whether food is a way to satisfy your hunger – of course it is. But rather, it’s whether eating out is really the only way to meet the need and to assess the other underlying feelings that are leading you to convince yourself that it is. Just like in the first example, though, these are often decisions made at the last minute and impulsively.

And they are also ways that $30 here and $20 there can end up adding up to hundreds of unplanned and unbudgeted spending at the end of the month. In the moment, they never feel like that much, but they add up quickly.

For example, if I’m driving home from a long day at work and I’m hungry, and I don’t have a plan for dinner, or I have a plan for dinner that’s labor intensive or doesn’t really sound very appetizing, going out or picking up takeout may seem like an irresistible decision in the moment. It might even feel like a need. And your hunger will, in fact be satisfied by this purchase. But the importance of identifying the other feelings at play here, whether they be boredom, convenience, etc. is that you won’t be able to see another option to satisfying your hunger if you can’t first identify what’s driving the desire to eat out when you hadn’t planned to.

If you’re simply feeling too busy, hungry, tired, or overwhelmed to actually prepare food, the solution can be as easy as stopping by the grocery store for a less expensive, low-effort option – like a can of soup, or making sure to keep a snack handy that will satisfy your hunger long enough to give you the energy to make dinner when you get home.

But, if you’re feeling bored with the food options you have at home, it may be time to put some effort into re-thinking whether the meals you’re planning have become too routine, and to introduce some new recipes into the mix. And in the meantime, since that’s more of a long-term solution, is there something you already have that you could do tonight to change it up that won’t involve the expense of eating out, like making breakfast for dinner?

If a lack of time in the morning has you running out the door before you pack a lunch, you could prepare a lunch the night before. But if it’s really that you’re bored with the sandwiches you keep pulling out of your lunch box, that won’t fix the compulsion to eat out instead of eating your sandwich. So maybe it’s time to think about adding something new to the lunch menu.

No matter the driving force behind all this unplanned eating out, the importance in identifying what’s driving it can’t be understated. Because if what’s really causing you to eat out is boredom with your current food options, but you misidentify it as being too tired to prepare food, then any of the alternative options you explore that will cost you less likely won’t be appealing to you because they’re not addressing the underlying issue that you’re just kind of bored with the food you’re preparing at home. A good way to recognize that you haven’t quite hit the mark on identifying the underlying driver behind your impulsive spending is that none of the alternative sound appealing or satisfying.

Looking for alternative ways to meet what underlies impulsive spending is not always easy, and it’s not always comfortable.

In fact, at times, you can be led down a path of realizing that you might be rather bored or generally dissatisfied with life, and that your impulsive spending may be your way of trying to avoid or distract you from that feeling. After all, it does provide momentary relief. But at what cost? It’s temporary (sometimes so temporary that only minutes later, you find yourself looking for another way to alleviate that discomfort), and it’s harming your ability to care for yourself financially.

So, if your path to uncovering what’s behind your unplanned and impulsive spending is deeper than just meeting a more superficial level of dissatisfaction with your menu or your home or the cold weather, it might be worth it to seek help from a qualified therapist to work through some of these bigger feelings of dissatisfaction that your overspending might be trying to alleviate for you. And the sooner the better, because overspending, particularly if it involves accumulating debt, is a problem that will only get worse the longer you put off dealing with it.

Ultimately, it’s not about whether or not it’s okay to spend money on things that are not necessary. 

If you can afford it, of course it is. But unplanned, impulsive spending that wreaks havoc on your overall financial health or actively works against your ability to prioritize saving for the things you really value is an extremely important thing to address. And in order to address it, digging down into the underlying motivation behind it can be a critical step in the process.

Is a Debt Management Plan right for you?

Is a debt management plan right for you?

If you’re struggling with debt, particularly credit card debt, it can seem like an almost
impossible hurdle to get over on your path to better financial habits. Continue reading to learn more about debt management plans

Whether you ended up in debt due to discretionary or impulsive spending, an emergency situation, or because someone once led you to believe that it was a good idea to carry some credit card debt (it’s not, by the way, but that myth is still pretty pervasive), doesn’t really matter. Once credit card debt is there, its high interest rates can often make it feel like paying it off is an impossible task.

While there are a lot of strategies out there to tackle credit card debt, this post specifically examines the debt management plan as an option for tackling your debt. Good debt management plans are offered by non-profit credit counseling agencies, and are designed to negotiate lower interest-rates on credit cards and/or personal loans to create a single fixed payment plan with the goal of eliminating this type of debt in 3-5 years.

As part of the plan, you’ll work with a credit counselor to develop a detailed budget that factors in what you can afford to pay monthly on your debt. This will then be shared with your credit card companies, who have to approve the plan before you can start. Once the plan is approved, you’ll make payments to the credit counseling organization, who will pay off your cards per the plan.

An important component of this plan is that it’s not a new loan. You haven’t taken out another loan to pay off your debt, the credit counseling agency is just a middle-person between you and your credit card companies in terms of both negotiating lower interest rates on your behalf and distributing your single payment to payoff multiple loans.

How will a debt management plan impact my credit score?

Without getting too much into the weeds of your credit score, a debt management plan will likely have both positive and negative impacts on your credit score initially, but the overall long-term impact if you follow through with the plan will likely be a positive one.

And, in terms of other debt relief options, like debt settlement, bankruptcy, or taking out another loan to pay off credit card debt, this option is typically going to be the best long- term option for your credit score.

For more information about the specifics of how debt management might impact your credit score, I encourage you to check out this article about the pros and cons.

Can I still use my credit cards while on a debt management plan?

While on a debt management plan, you’ll typically be required to close all credit cards and may not be able to qualify for new loans or lines of credit (it will depend on the exact terms of your plan).

While this can seem intimidating, in my opinion, it’s a huge positive of a debt management plan for folks who are struggling to curb their own credit card spending and who need a way to resist the temptation of financing new purchases. The truth is, if you’re in a situation where you’ve run up credit card debt and you can’t afford something without taking on more debt, then you likely just can’t afford it. Period. A debt-management plan will make this non-negotiable. You won’t have to decide anymore.

Planning

How do I get on a debt management plan?

A good place to start is to find a well-rated non-profit credit counseling agency to work with. Nerd Wallet maintains an updated list of recommended, non-profit providers. Stay away from for-profit companies who offer this service, as their fees can often be excessive.

To start the process of seeing whether a debt management plan is right for you, you can fill out the contact form that they have. At that point, you’ll typically meet with a credit counselor and from there, they’ll be able to work with you to determine whether you are a good candidate for this process. Though this won’t be the right fit for everyone, there is simply no harm in applying if you think it might be the right course of action for you. The process of applying will not impact your credit score at all, and even if you apply and are approved, you still have the final say about whether to enroll in the plan.

Participating in a debt management plan may have a few small administrative fees attached (typically a one-time setup fee and small monthly maintenance fee), but for lower-income participants these may be waived. If you find yourself meeting with an organization that requires an application fee, membership fee, upfront fee or per-creditor fee, this is typically a red-flag. You’re most likely at a for-profit agency, and I recommend going back to the list above and choosing to start with an agency on that list.

If I’m approved, what happens next?

If you are approved and do enroll, make it a priority to complete the plan. Make your payments to the credit counseling agency on time, and don’t overspend your budget. 55-70% of folks who start debt management plans see them through to completion.

As part of your budget, work to put some money away each month for unexpected expenses so you’ll have options besides credit cards if an unexpected expense comes up. Be open to suggestions that the credit counselor makes about budgeting. And remember it will likely be impossible to do this if you’re not willing to make some adjustments in your monthly spending.

Understand that this will not be an easy process, but if you’re going to get your financial life in order, tackling credit card debt and paying it off COMPLETELY, is an essential first step.

Resolutions Slipping? Techniques for Getting Back to your Money Goals for 2023

Techniques for Getting Back to your Money Goals for 2023

As a person who works closely with money, I know that on the journey to meeting one’s financial goals, there are many roadblocks, ups and downs, and that nothing ever goes quite as planned.

So, as we ease into and through the second month of 2023, as most new year’s resolutions (goals, intentions, whatever you want to call them) have slipped to the backs of our minds where they would like to hide out until next January 1st, it’s a great time to think about some techniques we can utilize to get back to living our intentions around better money management. So, if it feels like your financial goals are slipping or have already slipped away from you, instead of writing those goals off for 2023, try working through the steps below.

Take a break from spending photo of a person with coffee while working on their laptop.

Step 1: Pause

Take a break from money for a few days or a week. If possible, try to take a break from even your non-discretionary spending. I understand that in some cases, it’s not possible to go a week without spending at all (after all, bills, groceries, gas, and a few other items exist, sometimes with pressing timelines). But give yourself a break from all but the most essential spending and money decisions. They can wait. And likewise, don’t think about your savings goals during this time either. Just pause.

So much of our behavior around money is habitual and compulsive. It either feels good and successful, or it feels bad and out of control. And when we’re trying to create new habits, it can be almost impossible to see our way out of the space we’re in if we can’t get a break from it. Try to think of it as a money fast – you may not be able to go a month without spending, but challenge yourself to a few days, just to clear the system and the head. Use this opportunity to find a neutral headspace to work from.

Assess. An image of a person working in a journal.

Step 2: Assess

We deviate from our saving and spending goals for a lot of reasons. Sometimes, those reasons are not entirely within our control and sometimes they are. Sometimes it’s kind of a mix. From your neutral headspace, sit down and assess (honestly, and without judgement if possible) why you feel like the last week or month or two or three months have not been as financially well aligned as you wanted them to be. A few common reasons (more than one of which may be true for you) are listed below.

  1.  Some small or large unexpected expenses came up

2. You got carried away with spending in one or more of the following categories

a.  Eating or drinking out

b. Just general shopping for myself or others

c.  Entertainment or travel

3. You had an unrealistic idea of you were spending when you made your budget

4. You have friends or family who rely on you or ask me for financial support and you feel unable to say “no” to them

5.  Your kids have gotten used to a certain style of living and it feels impossible to explain to them why your family might need to make some changes

The important part is not to fix the problem at this step, it’s to be honest about what it is that’s causing you to deviate from your financial goals.

Step 3: Revisit Your Goals

Remind yourself of why you set these goals in the first place. Are you trying to improve your current life, your kids’ lives, care for your future self, get out of debt, just get a little more breathing room and control over your money so you feel less stress.

Don’t pretend like it’s just not that important, because you wouldn’t have set the goal (year after year, in some cases) if your current money situation wasn’t leaving you feeling a little or a lot less than great. Financial health is an important component of your overall health and self-care. And it’s important to acknowledge the impact improving (or not improving) your financial habits will have on your overall quality of life now and in the future.

Like any major change, you must constantly remind yourself of why this is important for you. How will it make your life better?

Changing habits is hard. Money habits are some of the hardest to change, and if you aren’t revisiting regularly why you are making these changes, it will be almost impossible to make them.

Revisit the plan. Image of a person sitting in a sweater, pondering while sitting on some stairs.

Step 4: Revisit the Plan, and Adjust if needed

The work you did in step 2 is important for this step, so if you haven’t done it yet, make sure to take the time to do it. If you don’t know how you got off track in the first place, you may not see where you need to adjust.

This is the time to put a clear plan in place to deal with the things that took you off course in the first place. How will you avoid being in a situation where you’re busy, hungry, and feel like you have no alternatives but to eat out? What systems do you need in place to curb excessive retail spending? What overall budget adjustments need to be made if this plan is going to be successful? (I challenge you to avoid the trap of thinking that everything in your budget is something that you and your family can’t live without).  How will you practice prioritizing yourself and your family’s financial goals when others come to you with their financial needs? What conversations can you have with your kids to make them understand that for the financial well-being of your family, you may need to change some of the things you regularly purchase.

Flat lay of a monthly planner

Step 5: Rinse and Repeat

Don’t fool yourself into thinking that this is a one-time thing. It’s not. I help people with this for a living, and even I go through these steps regularly. For me, they’ve become automatic, they’re built into monthly routines that make me take time out of my schedule to interact with my money, how I’m spending it, how I’m saving it, and how it’s helping me live my most well-aligned life. And yes, the routines themselves come with more automaticity over time, but the need for them does not go away.

One of the most important delusions to cure ourselves of is the one that suggests that if we just get the right plan in place, we won’t have to revisit and re-adjust. But we do, constantly. Financial progress is not about financial perfection. It’s about regularly interacting with your money and your spending, trying to minimize self-financial harm when you do get off course, and finding ways to course correct regularly, habitually, and sustainably, rather than making a grand gesture towards it once a year.

So, if you’re actually here to make a real change to your long term spending and savings habits – consider what you can do now, not a year from now, to get back on track with your money resolutions for 2023.

Connect with Lorri to discuss your goals today.
Schedule a call with Lorri

Making Your Financial New Year’s Resolutions Stick

Every year, about 50% of the new year’s resolutions that people make in the U.S. are related to money.

Whether we’re trying to save more, spend less, pay down debt, or simply get a better grasp on where our finances are, our relationship with money is one that we are often thinking about improving. But studies show that by the end of the year, only about 8% of all resolutions have been kept, and that most of us have given up long before that. So, what can we do to make our money resolutions stick?

A road through the mountains

Know your WHY

One of my favorite things to ask clients when they talk to me about WHAT they’d like to accomplish with money is “Why?” If you think you should be saving more, why do you think that? Is it related to a personal value, goal, or plan, like retiring at 50 or paying off your credit card debt, or is it something you feel you should be doing because of the general societal pressure we put on ourselves to always question whether we’re doing enough or the right thing with money?

Making financial change can be hard—it often involves delaying gratification, living with less, and having to bring your full brain and energy to thinking about your day-to-day financial decisions. If the only thing underlying your desire to improve your money game is simply a general sense that it could or should be better, sticking to your goals when times get tough will be nearly impossible.

So, before you sit down to write a new savings goal or debt payoff goal, figure out why it matters to you.

What is this change going to provide for you and your life that you don’t have now, and why is that important?

Take Stock of Where You Are

Trying to take on a new budgeting or savings goal without any current sense of where or how your money is being spent is typically a recipe for disaster. After all, without a clear sense of how much you spend or what you spend on, it will be nearly impossible to figure out ways to spend less.

Consider setting a new year’s resolution to carefully track your income and expenses all year, and to take a clear inventory of your net worth. Without this foundational piece in place, your plan for how to spend less or save more will likely run into all sorts of problems when it runs into the reality of your actual spending habits.

A commitment in the new year to simply getting a handle on and awareness of your income, expenses, and overall net worth may be the first step to setting a clear and manageable savings, debt payment, or retirement planning goal a year from now. But if you keep skipping this step, it’s likely that you’ll keep running into the same problems with follow through.

Have a Clear Sense of WHAT and a clear plan for HOW

Everyone likes the idea of saving more or paying down debt, but the idea itself is rarely enough to get us there. You need a plan tied to a clear objective. Finding an objective that’s just challenging enough to help you improve your behavior, but not so challenging that you’ll give up immediately, is the key to your success. This is why it’s so important to take stock of where you are. If you are overspending your income by several hundred dollars every month, setting a goal to save $500 is likely to leave you ready to give up by January 5th.

Find a manageable target, then go through your current spending and figure out how to hit that target. If you’re going to set up automated savings of $100 a month, you need to have a clear idea of how you’re planning to spend $100 less each month so that you don’t actually end up $100 short at the end of the month. Are you eating out fewer times? Cancelling or changing subscriptions? What change will you be making so that the extra $100 is there for saving.

If you’re planning to pay off debt, how much are you increasing your payments each month? Which debt are you paying down first? And how are you reducing your spending elsewhere to make sure you have that extra money to put towards your debt? Be as specific and realistic as you can.

It’s this step in the plan that will let you know if your goal is manageable and realistic. If you don’t have a clear plan for how it can happen, scale back, find something that is manageable, that you can build on over time. Small change, successfully carried out and scaled up over time, is going to be far more impactful than grandiose ideas of change, quickly abandoned.

For a lot of extremely good ideas on how to make these types of small but meaningful changes in spending habits, I highly recommend James Clear’s book, Atomic Habits.

AtomicHabitsBook

Photo: Goodreads

Have a Clear Plan for Dealing with Pain Points

Anticipating the pain points in any plan is extremely important. Pretending that they won’t be there is no way of dealing with them. If money goals didn’t have pain points, we’d all be steadily improving our money game year after year without issue.

Where is it that you will get tempted to overspend? If it’s eating out for convenience because you are just too tired to cook – you need a plan for fast, inexpensive, and easy to prepare food at home or on the go. If it’s overspending on a trip to Target or Costco, what’s your plan for dealing with that? This goes back to taking stock of where you’re at. If you have a clear sense of when, where, and how you spend money, you will be better able to predict those pain points, and plan for them ahead of time, rather than dealing with them in the moment.

Set Up Periodic Check Ins

No improvement happens on a steady climb uphill without bumps along the road. It’s up to you whether a bump in the road is the end of the journey, or simply something to navigate around. If you’re stick-to-itiveness around money goals tends to wane after a week or a month, set up routine check ins for yourself along those timelines. For couples, this might mean scheduling a weekly or monthly money date. If you have a financial planner, maybe this is just a monthly email check in with them. If not, a friend or mentor can often serve as an accountability partner to keep you on track. The important thing is not to beat yourself up over a slip up, it’s to figure out how to course correct before it gets too out of hand.

One of our greatest fall backs in resolution setting is that we set resolutions with a sort of planning euphoria – one that ultimately leads us to ignore the fact that of course this isn’t easy. Instead, we love to make the plan imagining ourselves showing up to it energized and excited every day. But if we go into our plans fully acknowledging that that won’t be the case, we can both plan for how we stick to it even when we don’t feel interested in or excited about it, and plan for routine ways to check in and get ourselves back on track when we start to slip up. The next step up in your money game isn’t perfect money management, it’s getting a little bit better, every day, every month, every year. And having routine ways to reconnect with that is extremely important to sticking to that path of gradual improvement.

Creating Savings Targets that Work

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.

  1. 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.
  2. 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.
  3. 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

The Importance of (Flexible) Goals

As someone who helps people design plans to meet their financial goals, I’m extremely interested in how we set goals, and why they do and do not work for us. While a stream of motivational quotes and speakers showing up routinely on our social media feeds might have us believing that we must set aggressive goals, pursue them with ruthless determination, and never give up until we attain them, for many people, the level of rigidity attached to those “never give up goals” is actually more of a deterrent than a motivator.

It is hard to know what we’re going to want a month from now, much less a year, five years, or twenty years down the road. But to avoid waking up each day and wondering “how did I get here?” or feeling like somehow life is happening to us or around us, without our input, it’s important to give ourselves some direction about what we want in life.

The Importance Of Goal Setting

Goals gives us direction. If we think about our life as a map of the world, we can either say, “I’m content to end up anywhere on this map,” or, “Here are some places I’d like to go, and some things I’d like to see.”

That’s really all goal setting is–looking at your options, and identifying the ones you want to prioritize in life. After all, most of us are not actually completely indifferent to where we end up. And taking an “any which way the wind blows” approach to life leaves a lot up to chance. While we might look back pleased with where the wind blew us, it’s also quite possible that we’ll end up wasting our days and money on something that’s not really important to us. So, if you happen to have a preference about where you end up or where you visit along the way, it’s extremely important to pick a direction you want to go, and then start thinking about how to get there.

Let’s shift that analogy to think about finances. If you’re equally happy with the outcomes: retiring at 55, taking a year off to travel the world or stay home with your new baby, declaring bankruptcy, and losing your home, then it’s fine to proceed without any goal or direction. But if you look at the map of financial possibilities, both good and bad, and you are drawn more to certain outcomes than others, then it’s important to take that first step and identify what you think you want. We’ll explore techniques to get there over the remaining posts in this series. But it’s hard to plan a route if you have no destination in mind.

Making Goals Flexible

You might wonder, “How can I set goals when I’m not sure what I want or what my future holds?” or, “What if an amazing opportunity comes along that I didn’t see coming? Will setting goals interfere with my ability to be spontaneous and live life in the present?” The good news is, no. Goals don’t have to lock you in. They are actually less permanent than tattoos. They should change with us as we get clearer about what we want from life. Maybe you don’t know when you’ll want to retire, whether you’ll want to own a home, or quit your job to travel the world, write a book, or be a stay at home parent. The secret is, you don’t need to. You just need to be willing to take your best guess.

I remember taking myself through through this exercise a few years ago. In my twenties I had some big goals for myself — pay off my student loans, save 15% of my income for retirement, and buy a home. After I bought my house (the last item on my financial “to do” list for that decade of life), I became a bit aimless. I got lazy with how I spent my money, often buying things that I could afford without giving much thought to whether I really wanted them. For awhile, it was sort of freeing to be able to go out and buy something and not feel financial stress about that choice, but then I started to notice that all that aimless spending was sort of bringing me down. I felt like I was wasting money that I knew I would want or need someday, I just didn’t know what I would want it for.

So, I made myself think of something that sounded kind of great to be able to give myself in the future, and I started saving to put wood floors into my house. Over a few years the savings account and the money in it evolved in this sort of a fashion:

In three years I changed the goal multiple times. You might say I didn’t know what I wanted, and you’d be absolutely correct. The point is, it didn’t matter. Having something that I thought I wanted motivated me to reconnect with intentionally spending and saving money. When I finally figured out that I really wanted to start my own business, the money that I needed was there. The temporary goals actually allowed me to be more spontaneous in my decision making because I didn’t have to wait to save up the money I needed or take out a loan.

We don’t need to set our financial goals in cement. In fact, I like to think of them as more like those movable archery targets. We put them out there to guide us, but we can pick them up and move them as we go. Sometimes the moves are drastic turns, other times they’re just minor adjustments to the course. If you decide to start saving for a down payment on a three bedroom house today, but five years from now you’d rather have a paid off tiny house and use the money you would be spending on a mortgage to travel or save for an early retirement, that’s great. Nobody says you have to keep those targets where they are. But by putting a few out there, you’re giving yourself a reason to think about intentionally earning and saving money today for something you’ll value tomorrow.

So take some time to think about what you really want. Look at the map of financial possibilities that exist in the world, and start to identify what’s appealing to you. What do you think you’re going to want a year from now, five years from now, twenty years from now? Challenge yourself not to leave spaces blank, but remember, it’s perfectly okay to write in pencil. In order to keep working towards our goals, they need to evolve with our vision for the life we want.

This is the first post in the series: Planning for the Life You Want

Disclosures & Policies

Sustain Financial Inc. is a Registered Investment Advisor in the State of Washington and California.

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