Nobody intentionally wants to fail at personal finance, so why then are we so tragically awful at it?
A tiny sampling of reasons includes:
- A lack of personal finance education on how to succeed (and zero time invested to change that).
- The use of money as a status symbol.
- A misguided belief that more stuff = more happiness.
- Lack of discipline and/or personal responsibility.
- Lack of gratitude for what one has.
- The negative impact of debt.
- Inadequate income to cover spending levels.
- Choosing convenience over savings.
- Fear of missing out.
And that’s just to name a few…
There are millions of articles written on these topics, and even if you have failed at personal finance, you’re probably at least aware of what the reasons are.
There is, however, one massive area that I think is often overlooked in personal finance: managing the gap between your reality and your financial goals.
Even those who fail at personal finance have likely set financial goals at one point or another, whether it’s getting out of debt, saving up for a big purchase, or reaching financial independence and retirement.
But there is often a huge gap between our present reality and where we want to get to (our potential). That’s a problem. If that gap is too big, it can lead to a sense of hopelessness and paralysis.
The challenge is that we all have to start somewhere. And most of us start from ground zero (or below).
I know what it’s like to be miserable in a job but have no savings to be able to walk away from it. I know what it’s like to have a bigger mortgage than I could really afford and see no clear path out of it. I know what it’s like to look at a retirement number and be crushed by the magnitude of how many decades, years, weeks, days, and soul-crushing hours stood between me and that goal.
The bigger the gap between our reality and our goals, the easier it is to give up entirely and revert back to poor habits.
So what’s the secret to overcoming this challenge?
Setting short-term, but audacious goals that you can immediately act upon. The process looks like this:
- Keep the long-term goal in mind, but set short-term goals to get started (starting is the hardest part).
- Track your efforts and progress.
- Repeat until you’ve reached your long-term goal.
Your long-term goal is to retire in 20 years. But you have zero net worth, zero retirement savings, and a personal savings rate of zero. To get to retirement in 20 years, your personal savings rate would need to be ~45% over that time. That’s a huge gap.
You know what your long-term goal is, so your short-term goal should be to get to 45%, or better yet – ASAP. Your short-term goals could be:
- Track all of your spending by category in a budget spreadsheet.
- List the 5 changes you can make in the next week to boost your personal savings rate to 10%.
- List the 10 changes you can make in the next month to boost your personal savings rate to 25%.
- List the 25 changes you can make in the next year to boost your personal savings rate to 50%… and so on.
Once you’ve done those things – track it to see your progress, persist, and repeat.
If you get good at this, it is amazing how second nature it becomes and how easily you can blow away your initial time-frames to achievement.