Most of us fail miserably at personal finance. In this country, personal savings rate are abysmal, net worths are tiny, and retirement savings are almost non-existent – across all age groups.
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.
It’s sad to see how hard people are working and they have almost nothing to show for it. Pathetic retirement savings and no money in the bank and a car they are underwater in. That’s the reality for many Americans regardless of their income.
I really like your recommendation. Setting goals that are small in nature but are ambitious enough to produce real change is the key. Great post!
This is an outstanding post. It is so tough to stay motivated when you are so far away from your goals. But building momentum is key, as described here.
Everyone needs to be honest with themselves. Period. STOP pretending your personal finances are fine when clearly you have problems. Everyone goes through it but lets stop sugar coating the fact that its acceptable and that sweeping it under the rug is OK. Be honest with yourself. We can’t always afford what we want when we want it but don’t downplay it either with the people you’re around. Let them know what your bigger goals are so they can help you save up for whatever it is you want to do. I used to be so scared to admit in my 20’s that I was always strapped for cash and had $1 in my bank account. I was usually broke. Now that I’m 30 this year and things are looking much brighter for my personal finances, the first thing you need to do is stop thinking about what others do with their money and worry about what you can do with yours. I want to keep my reply short because there’s tons of books and articles about what to do to save but really my point of my experience is that mine was emotional. I didn’t want to miss out on anything in other peoples lives and wanted to go do everything my friends and family did. Rather than be responsible for my own life and my own hard earned money I used it on the wrong people and the wrong stuff. It’s been a hard lesson in life but the first step is to admit that you can’t hide from your financial ruin and the government won’t let you forget. Your financial future begins from within yourself and you are in control of it.
I think first step what you should do is record your expenses. Keep track of your money to know how much you have spent and how much you actually earned. Make a monthly budget and try to stick to it. Limit overspending and stress spending.
You can also start to save money in an emergency fund every month which can be used as your retirement money, vacation money or for mortgage down payment.
I like the progressive measures to increasing one’s saving rate. It can be very difficult when taken on all at once. The jump from 0% to 50% is quite difficult. A list of objectives os certainly a great way to go. Personally, I have found that increasing my income is also a necessary step. Usually through real estate as a passive income, then saving and reinvesting 100% of those funds. Good post!
I think in some cases it can be difficult being honest with yourself when it comes to finances. When I was in a situation when I wasn’t focused I hired an advisor to keep me safe while taking the risk I wanted. Make sure you have your back covered. I’ll leave a link to my advisor in Greenville that gave me so much help
Setting short term goals is a great start towards attaining your longterm personal financial goals.That is currently the stage where I am still learning the ropes ,but of course I have learnt that it demands a great deal of your persistence ,consistency and above all being yourself. Whether your a starter or you’ve been there long enough to understand, one thing is guaranteed ;that if your truly stick to the set financial plans ,financial success is inevitable.As for my case I can clearly state that the future looks bright and there is much to look forward to.A realistic budget, discipline and living within your means all constitute the ingredients of personal finance independence.All the best as we embark on this undertaking that will in the end better our future lives and livelihoods.from Kenya.