While I love writing and talking about all of the benefits of financial independence and financial progress, I'll be the first to admit that the path is difficult. Although the ideas behind personal finance are easy, actually putting them into practice is incredibly hard. So how do we overcome the challenges? This post originally appeared on The Simple Dollar.
That's why more than three quarters of Americans live paycheck to paycheck and only a tiny sliver of Americans manage to accumulate enough wealth to be able to retire in comfort, let alone retire early. One in two Australians live paycheck to paycheck, and have unrealistic expectations of their retirement needs.
The concepts are easy. Actually making it happen? It's very hard. Why is it hard, though? Why do so many people dream about and plan for financial success, but so many people fall short along that path?
Having spent almost an entire decade turning around our disastrous financial situation and then moving along the road to financial independence while writing and learning about personal finance all along the way, I've found that there are five big reasons why people find it hard to find financial success.
Let's dig in.
Reason #1: Spending Money Offers Positive Short-Term Feelings, While Saving Money Does Not
Let's be honest: It's fun to buy something new, something you really want. There's a certain amount of pleasure that comes from buying a latte or buying a new gadget or buying a book or buying some new clothes or buying a game or whatever it is that you enjoy spending your money on.
The problem with that is that the positive feeling rarely lasts. You drink the latte and move on with your day. The new clothes wind up in the closet, mixed in with the rest of your wardrobe. The new gadget either becomes a part of your ordinary life or winds up forgotten in your home. The good feeling goes away and you're left with more of the ordinary.
Of course, we rarely think of that in the moment. We think of the desire we have and the short term pleasure we'll get… and then we go for it, to the detriment of our long-term plans. A day later, the purchase is forgotten, but the money spent leaves a hole in our pocket. The money is gone and we gained exactly nothing that lasts.
Here are three strategies for moving beyond this trap.
Spend your free time on free and inexpensive things that you personally enjoy. In other words, rather than spending money on things that bring you that burst of short-term joy, spend time instead. Drop some of the things in your life that you spend time on that don't bring you joy — like maybe the time spent on some of your least favourite television shows or time spent aimlessly visiting websites — and add in things that do bring you joy.
Reflect often on the drawbacks of spending and the benefits of saving. I do this kind of reflection when I'm in the shower or when I'm driving somewhere. I think about some of my most recent purchases and recognise that the joy from the purchase didn't really last, and then I consider that I'd prefer to have that money in my transaction account right now instead. I think about how that money would actually be another step toward my big goals instead of something that's forgotten a day or two later. This is a mental conversation I have with myself quite frequently.
Alter your social circle. If you find that your social circle is regularly part of the reason why you're spending money without a plan and without consideration for the future, then consider altering your social circle. Having a circle of friends is a powerful thing, but it should not come with a price tag. Encourage your friends to do things that don't require additional expense, such as having dinner parties at home or potluck dinners instead of going out. If you do like going out, focus heavily on the specific things you like doing and bow out of the other things. The idea here is that social interaction shouldn't require you to drain your wallet. Good friends don't cost very much.
Reason #2: Financial Goals Typically Take a Long Time to Achieve
If you have a big overarching financial goal that you're working towards, chances are that you're looking at something that's not going to be completed for a long time. That time is probably measured in years or even in decades.
A long time, indeed.
Humans aren't exactly the most patient of creatures, either. When you start considering things on the scale of years or decades within your life, it's pretty easy to start losing touch with that goal. It becomes a vague "someday" goal, one that has little impact on our day to day life, and because of that, it's very easy to just walk away from such a goal and completely give up on it.
It can simply feel like you're "never" going to get there, so why bother? Here are three methods of getting past this obstacle on your path to financial success.
Focus on "microgoals" on the scale of a day, a week or a month. Rather than focusing on the enormous overall goal all the time, focus instead on "microgoals", ones that can be completed in a day or a week or a month. As long as the end result contributes to your overall goal, they can be quite useful.
Microgoals can take a lot of different forms, from trying to establish better life patterns, pushing toward specific milestones or even tangible projects that cause you to spend less or earn more going forward.
For example, you might choose to set a goal of spending no money on your favourite hobby for a month. On the other hand, you might set a goal of bringing your savings up to $5000 by the end of the month. Or, you might try something like air sealing your home this weekend to cut down on future energy bills.
All of those projects contribute toward positive financial goals and they give you something much more tangible to focus your energies on. As the saying goes, the devil finds work for idle hands to do, so keep yourself from being idle.
Look at the change you've already made, not the distance to the goal. When you're working toward a big goal, it's tempting to keep your eyes on the prize. After all, this is all about where you want to go, right? You're moving in a positive direction. Why would you want to look backward?
Well, the big benefit of looking backward is to see exactly how far you've come. Where were you at a year ago? Six months ago? Even a month ago? How have your account balances improved? How much has your debt dropped over that relatively short period of time? What about since the start of your goal?
The thing is, when you see that you're actually doing this, that your financial state has improved by leaps and bounds, and that you're making real progress toward the big goal, it starts to feel a whole lot easier to make it to the big goal.
Focus on building positive life routines that make financial progress into a foregone conclusion. This is very much in parallel with the idea of microgoals, but it's just a bit of a tweak on that idea. Rather than setting a strict goal for yourself, you simply repeat a very specific thing over and over and over again, every day, until it becomes your new normal. If you do that with a lot of specifics in your life, you're going to slowly transform your life into something that marches toward your goal with ease.
Let's say, for example, that you eat out a lot. You decide to cut out eating at fast food places and at "casual dining" restaurants, leaving your eating out solely for special occasions at great restaurants. You focus on this change one day at a time, which means that you make a lot of meals at home, pack lunches to take with you and so on. Over time, this becomes the new natural for you — the idea of going to Mcdonalds or to the food court even every once in a while begins to seem a lot less appealing.
Our lives are full of routines like this that can be tweaked for our personal benefit. We can tweak our spending routines, our commute, our diet, our morning routine, our bedtime routine and on and on and on. Tweaking those things can add up to some real benefits, especially if you keep working on the tweak until it becomes your new normal.
Reason #3: Financial Goals Are Often Very Passive After the Initial Actions
One thing that happens with almost every financial goal is that there's this big rush of initial action to get things in place, but once that's all done, progress toward the goal tends to run almost completely on autopilot.
That's a great thing in terms of consistency, but in terms of feeling connected to the goal and really feeling like you're working toward something... it's not so great. That long "passive" period can leave you feeling very disconnected from your goal and can easily turn into disenchantment and abandonment of that goal. If you're not in touch with it, it's easy to start wondering why you're putting that money away at all, and from there it's easy to simply quit.
The trick is to find ways to stay connected with your big goal even during your long trek through the peaceful valley of slow progress. Here are three tools for doing just that.
Work on big, active projects that result in savings. One great method of keeping yourself focused while you're in that valley of slow and steady progress is to find useful projects to work on, ones that have results that can be helpful for your overall goal. Since almost every financial project leans heavily on the concept of "spending less than you earn", finding ways to spend even less is a great way to accelerate almost every financial goal.
What kind of big, active project causes you to spend less? Doing things like making lots of meals in advance and freezing them, air sealing your home, doing your own home repairs, adding home insulation and doing your own car repairs all lead to reduced expenditures, both in the short term and in the long term.
They're all big projects, of course, but that's kind of the point here. If you throw yourself into a big project that happens to have a result that involves spending less money, then you're going to have more money free to push yourself toward your goal faster than before. That's a great thing.
Similarly, work on big, active projects that result in increased income. On the flip side of "spending less than you earn" is the earning component. If you increase your earnings, you're also going to find yourself accelerating toward your big financial goal.
There are many, many ways to earn more, but they all tend to require a lot of sustained time and effort. You can start a microbusiness in your spare time, like launching a Youtube channel. You can work toward earning a degree or earning more certifications. You can simply put your nose to the grind at work and build up your standing there in an effort to get a promotion. All of those things work. All of those things can put more money right in your pocket.
The challenge is devoting the time it takes to make those things happen. The reason everyone doesn't inflate their income is that not everyone is willing to devote their time and energy to it. For those who do, there are many, many routes to earning more money out there.
Get involved socially with others who are working on these kinds of big projects. Look around your community and see if there are any entrepreneurial groups, professional groups or do-it-yourself groups in operation. One great place to look for such groups is meetup.com; another is your local library. Then jump into those groups.
What you're going to find there are people motivated and willing to take on big projects with the strong potential of saving or earning money for themselves. If you're attracted to the idea of increasing the gap between what you spend and what you earn and you're willing to take on big challenges to get there, you're going to find some value in those groups.
The real advantage, however, is the social surroundings. With such groups, you're going to find yourself socialising and associating with people who are focused on building their income or on saving money. Those attitudes are going to rub off on you over time and encourage you to take on these kinds of big projects yourself.
Reason #4: Financial Goals Can Seem Impossible to Reach
When you sit down and stare a big financial goal right in the face, the sheer number can leave you feeling intimidated.
When you look at a goal that requires you to have ten times your annual salary in the bank — or even more, in the case of things like retirement savings — it can feel like you are never going to make it to that goal. Ever. It feels completely out of reach because you're looking at a number that's an order of magnitude more than anything you've ever dealt with before in life.
Many people respond to that by giving up. By not even trying. And, because of that, they miss out on many great things in life.
Here are three useful strategies to apply if you find yourself feeling as though the sheer size of your goal makes it impossible to reach.
Break your giant goal down into smaller stages that seem possible but still seem challenging. The end result might seem enormous, but what about the first milestone toward that goal? Does that seem overwhelmingly large?
If you haven't already done this, break your big goal down into smaller milestones, preferably in such a way so that the first milestone feels like it is within reach in the next year or so. Each subsequent milestone should have a similar gap behind it. The idea here is to sketch out a series of milestones, ideally a year apart or less, that you can reach if you put in some effort and that gradually move toward that giant goal that's far off on the horizon.
For example, if retirement savings is your goal and you need to save $1,000,000 in 30 years, you're going to have to sock away somewhere around $10,000 a year on average to make it there. So focus on that milestone. You need to save $10,000 this year to make your big retirement goal. So, how can you contribute $10,000 to your retirement savings this year? It's still a challenging goal, but it's not a seven-figure goal.
Think about what you're working for beyond mere finances and how you can use non-financial approaches to help achieve your goal. It's easy to get stuck in the trap of thinking of financial goals as something that's purely about dollars and cents, but the truth is that most of our spending follows in the wake of our other lifestyle choices. When we choose to live in a certain place, our reasons are usually numerous and only a few of them typically have anything to do with finance.
Rather than focusing on the dollars and cents, sit down and start thinking about the other aspects of your life. What things are genuinely important to you? What things do you spend time and money and energy on that are less important to you? Are you happy with where you're living? Are you happy with your job?
Often, shifting your life in a way that makes you feel more content can really help make big goals seem more possible. You'll find yourself more energised to reach for milestones and to set up projects that can improve your financial pace.
Adjust your goal to make it more realistic if it feels completely overwhelming. In the end, it may simply be true that the goal you've set is just too big. Even when you break it down into milestones and dig through your life to find new approaches, the goal is just not attainable without some kind of miraculous intervention.
If that's the case, don't be afraid to tone down the goal a little bit. Consider postponing the goal for a few years, giving you more years to work toward it. Consider ways to reduce the target you're shooting for. Consider staying in your current career — or in the workforce in general — for a bit longer.
The idea isn't to abandon your big goal, but to tweak it enough so that achieving it feels at least possible. I tend to find that these adjustments work well hand in hand with the milestone idea I discussed earlier, as adjusting a goal until the milestones look possible is a great way to start off a project.
Reason #5: Life Always Seems to Intervene
One big final reason why it's hard to make financial progress is, well, ordinary life. Murphy's Law. Whatever you want to call it.
No matter how wonderful your plans are, sometimes life just intervenes. You lose your job. Someone gets sick. Your car needs replaced. Your hot water heater fails and floods your basement. And, with that, your plans start to go awry. The path you were on is suddenly diverted and the big goal seems farther away than ever. It begins to feel impossible.
It doesn't have to be this way. You can take action now to protect your progress toward your big goal. Here are three things you can do.
Build an emergency fund. Cash is king. Having a pool of money available to be used solely in the event of an emergency makes it so much easier to roll through a job loss or a car problem. You don't have to abandon goals or cut back on your progress toward goals, either.
It's easy. Just set up an online savings account with the online bank of your choice, then set up an automatic transfer once a week into that savings account. Just transfer a little bit — $10 or $20 or $50 or whatever works for your budget. Then wait.
When an emergency happens, you don't have to panic. You don't have to go into debt. Instead, just calmly transfer money back from that emergency fund into your transaction account and deal with it.
Some people like to use a credit card for this. That's a bad idea because it won't work in an identity theft situation, plus you'll be dealing with the credit card debt which will knock your goal off track. Use cash.
Weed out unnecessary risk in your life. What things in your life pose the highest risk of knocking you off of your path toward your goal? Is it your health? Maybe your car is on its last legs. Perhaps you have friends that convince you to make mistakes of all kinds. Whatever it is, minimise that risk in your life. Alter your social circle. Be proactive about your car problems. Get some exercise and eat better. Work on getting a more stable job. Know your public transportation options.
The fewer obvious risks you have in your life, the better. You can make yourself much less likely to be knocked off the path.
Plan for upcoming challenges. Many of life's challenges can be seen well in advance. You know that property taxes are going to be due quite regularly. You often know when a car is going to need to be replaced. You know in advance when insurance bills are going to arrive. Plan for those things!
Start setting aside money right now for those kinds of planned events. If you'd like, you can even use the same plan as you use for emergency fund savings — just transfer more each week than you'll need for all of these upcoming known expenses so that the rest can be present for emergencies.
This way, those known expenses won't knock you off of the path to success that you're on.
No matter what obstacles you perceive to be standing in the way of the big goals in your life, there's always a way around those obstacles for those who really want something better in your life. Don't let these challenges to your financial progress stand in your way.
Rise above it. Achieve your goals. Walk right past these obstacles into the life of your dreams.