When you start paying attention to your finances, the progress can feel amazing. Over the first few years of our financial turnaround, we saw our net worth go from negative to positive. We also witnessed our net worth make some amazing leaps in terms of percentage growth, moving from what seemed like a tiny net worth at the start of one year to an amount that was a pretty nice portion of our combined salary at the end of that year, meaning we saw a roughly 300% jump in our net worth.
Amazing, amazing stuff.
Over time, though, our progress felt like it was slowing down. At the start of one year, our net worth was at roughly $40,000 and at the end of that year it was at $70,000 because we managed to save $30,000, which is a 75% improvement. The next year, though, we managed to save $35,000 and saw our net worth rise from $70,000 to $105,000 – but that was only a 50% improvement. The next year, we managed to save $40,000 and watched our net worth rise from $105,000 to $145,000, which was only a 38% improvement. (Note these numbers are a rounded approximation to make the idea clear.)
We were actually saving more than ever before, but the growth rate of our net worth was slowing down.
To make matters worse, all of our goals for the last few years have been very long term goals. We’re looking at things like financial independence or a nice home in the country or early retirement, goals that take many years to achieve and are still far off in the future.
Many days, it feels like we’re approaching those goals at an absolute crawl.
Sure, our overall net worth is the highest it has ever been and, as we age, we do get closer to those goals, but the pace is slow. Early on, there were big successes every month. Now? It feels like the successes we want are years away.
This valley, where it feels like the next destination is so far away, often feels like it would be a great place to quit. We could buy the exact country home that we want right now, but we’d be in debt. One of us could retire right now, but we’d be in a precarious situation. Alternately, we could just start buying things and fulfilling all of our little whims, but all that would do is just make our big dreams move even further into the distance.
Through all of that distraction, though, we’re still pumping along. Day by day, week by week, we’re moving toward our goals. We’re even picking up a little bit of speed, as our dividends and returns on our investments grow.
How do we keep ourselves on this path? We employ five strategies.
Strategy #1 – Focus on the Shrinking Distance to Your Goal
Over time, as your net worth mounts, your percentage increase each year is going to decrease (unless you have a big jump in your other sources of income). That’s disheartening, because it makes you feel like your progress is actually slowing down when it might not be.
Instead, I’ve found a lot of value in looking at how much distance I’ve crossed toward my goal. Instead of counting up from my current level, in other words, I count down from my goal.
Let’s use really round numbers to give you the idea. Let’s say my goal is $1 million and each year I add $100,000 to my investments. At the start of the first year, my investment total is $100,000 and, over the course of that year, I add $100,000 more to it. That means that the distance to my goal went from $900,000 to $800,000 over the course of that year, which means I moved 11.1% closer to the goal (the $100,000 my investment grew divided by the $900,000 I still have to cross). The next year, I add another $100,000 to that goal, reducing the distance to the goal from $800,000 to $700,000. That means I moved 12.5% closer to the goal (the $100,000 added divided by the $800,000 left to go at the start of the year). The first year – 11.1% – was good. The second year – 12.5% – was even better.
That kind of measurement of my progress makes me feel like my continuous efforts really are producing better and better results over time. It makes it clear to me that staying on track is paying real rewards. I’m moving faster and faster toward my goal over time, and I’m excited again as I want to see that percentage progress each year really spike.
You’re not changing anything about the numbers at all. You’re just looking at them through a different lens – you’re looking at the distance left to go and you’re seeing that as time passes, you’re moving across that distance faster and faster and faster, and you want to do what you can to keep accelerating! At least, that’s how I feel.
Let’s work through a more specific and perhaps realistic example of this. Let’s say that our financial goal is to have $1 million in investments and we have $200,000 in the bank. Your goal might be very different – maybe you just want to have $20,000 for a down payment and have just $4,000 in the bank. This is just an example, to illustrate how this works.
The traditional way to look at that financial state is to look at your net worth. Let’s say that you have $20,000 in other assets – you have a decent car and some collectible items – and no debts, so your complete net worth is $220,000. Each year, you’re managing to dump $10,000 into your investments and then the investments increase in value by 7%.
So, at the start of the year, your net worth is $220,000. You add $10,000 to your investments during the year, bringing the total of your investments up to $210,000, and they increase in value by 7%, bringing it up to $224,700. Add the $20,000 in other assets you have back in and your net worth went from $220,000 to $244,700 that year. Your net worth went up 11.2% that first year! Great!
But what about year two? Your net worth is $244,700 at the start of the year, of which $224,700 is investments. You add another $10,000 to your investments and they go up by 7% overall, bringing your investment total to $251,129. Add back in that $20,000 in other assets you have and your net worth went up to $271,129. Believe it or not, your net worth only went up 10.8% your second year. Based on the metric of net worth, you’re actually slowing down.
So let’s look at it another way. Your goal is $1 millon in investments. At the start of the first year, your investment balance at $200,000. You have $800,000 left to save. During that first year, your investment total goes up to $224,700, as noted above. You now only have $775,300 left to go. During that year, you devoured 3.1% of your remaining goal – not bad. But during the second year, your investment total goes from $224,700 to $251,129. You now only have $748,871 to go. During that second year, you devoured 3.4% of your goal.
Maybe 3.1% to 3.4% doesn’t seem like a big leap to you. Sometimes, it doesn’t seem like a big jump to me, either. But here’s the thing – as long as I keep things steady, that number gets bigger and bigger. In year three, it’s going to be about 4%. The next year? About 5%. Why is that happening? I’m knocking off bigger and bigger pieces of my remaining goal. To me, that’s exciting. That’s invigorating. It makes me want to keep my foot on the accelerator, because I know that the harder I push, the faster that percentage grows, and the faster that percentage grows, the faster my goal gets there.
So, for me, I focus on how much distance to my goal that I’ve covered in the last year, expressing that as a percentage. As long as I keep working, that percentage keeps growing.
Strategy #2 – Focus on Your Own Behavior and Day-to-Day Choices, Not Your Overall Financial State
In our relationship, I’m much more of a numbers person. I’m inspired by the numbers more than Sarah is. Perhaps you’re more like Sarah and you’re not a big numbers fan. What can you focus on instead to get you through that valley?
We usually achieve this by focusing mostly on our own behavior and day-to-day choices. I do this myself, but Sarah excels at it. We both like to look through our spending and other behavioral decisions throughout the day and ask ourselves whether they make sense.
Personally, I do this through a “weekly review,” something I’ve mentioned before on Money360. Once a week, I spend an hour or so looking at what I achieved during the past week, what I hope to achieve the next week, and also think about some of the day-to-day choices I made (I usually do this with the aid of my pocket notebook and my credit card statements, as well as my own memory). Were they good ones? Bad ones?
Sometimes, I won’t even draw a conclusion during that review. Instead, I’ll think about it when doing something else, like taking a shower or driving to the nearest town of any size. I’ll run through that decision in my head, figure out whether it was the right call, and then if I didn’t make the right move, I’ll imagine the situation as if I did make the right move.
Asking myself all the time whether my expenditures are actually wise has, over time, really sharpened my internal sense about whether I should spend money on something. I have a clear sense as to whether a purchase is actually a need or just a want that I’m convincing myself that I need. I also have a clear sense as to whether or not a particular purchase will bring me lasting joy – and I usually come to the realization that it won’t.
Strategy #3 – Automate Your Future Planning, Then Focus on the Short Term
At this point, most of our bills and all of our investing is completely automated. Most of the time, the only reason I check my checking account online is to make sure that any income that we’re due to receive is actually deposited on the expected day and to make sure that there weren’t any unauthorized transactions.
This achieves two vital things at once.
First of all, it ensures that we keep moving toward our financial goals without having to think about it. Each and every week, money goes into our investment accounts. Each and every week, our bills get paid a few days before their due date. Those things happen automatically without us having to think about it. The only drawback – and this is a small one – is that we keep a nice buffer in there in case something goes wrong.
Second, it reduces the amount of money we actually have available to spend in a given month. Since a lot of our money is leaving automatically, we don’t have a whole ton of money that’s left behind after all of the automatic transactions are finished. We have to be a little bit careful with that money. We can’t just spend recklessly on every whim or else we’ll either start building up credit card debt (which we know to be a very bad choice) or we’ll overdraft our checking account.
This method, sometimes described by other personal finance sites as “pay yourself first,” basically forces us to budget our lifestyle. Since a significant portion of our income just vanishes into investments, and another significant portion disappears into our regular bills, we’re left with a pretty small amount with which to do things like buy food, household supplies, clothing, and entertainment and hobby expenses.
This isn’t a bad thing at all. It’s a very good thing. It ensures that we don’t allow our spending to escalate just because we have money. We could most certainly afford more things than we buy, but why? We honestly have everything we need. And even if we chose to do so, we’d have to make the active choice to cut our weekly investment funding – and that would be a miserable choice.
Strategy #4 – Discover Non-Financial Goals to Fill Your Heart and Mind
People who turn around their finances in an abrupt fashion are usually able to achieve that because they’re very goal-oriented and achievement-oriented people. They set goals in their life and they’re able to work toward them effectively, and a financial turnaround is the result of applying that mindset to finances.
However, there comes a point where most personal finance goals are long term things. Sure, you have a strategy for getting there – like the automatic strategy discussed above – but in terms of day-to-day choices, there’s really not much to do.
This can leave people struggling. Often, the thing that has put people in a position to have that kind of turnaround is a laser-like focus on their finances, and when you reach a point where things are on autopilot, you really don’t have anything to focus on with any intensity.
Obviously, the best approach is to find other areas of your life to focus on. The trick is to make sure that when you refocus with new goals, you don’t let go of the attributes that brought you financial success to begin with. In other words, don’t switch to new non-financial goals that involve extensive spending.
For me, I switched my focus to family matters, community matters, and independent learning. I found many ways to engage in all of those things without ramping up my spending very much at all (I’d say not at all, but there were a few expenses here and there). I simply pushed my goal-oriented self onto other goals.
As I said, this approach works well when you combine this strategy with the previous strategy and put your finances on autopilot. In that situation, you’re essentially functioning as someone with a lower salary and a somewhat different focus on life (though you haven’t left your financial skills behind).
Strategy #5 – Devote Your Energy to Increasing Income
If you still feel a strong need to do everything you can to maximize your financial state, pour your energy into increasing your income.
Increasing your income is a tricky area to talk about because it’s not always as cut and dried as cutting back on your spending. Everyone is in a very different situation, with differing skills and differing amounts of time available and different professional and personal situations, all of which radically alter their ability to increase their income.
Still, there are many general approaches you can take, utilizing your spare time and energy, that can result in an increase in income.
You can start a side business, which can eat as few or as many hours as you wish and provide another income stream for you.
You can create information products, like starting a Youtube channel, writing a book for the Kindle, or creating a website. Those strategies might not earn you very much, but once you’ve produced something, the income from that thing becomes a largely passive stream.
You can improve your education by going back to school. If you’re in a strong financial state at the moment, this could be a good choice depending on your career status and goals.
You can get a second job, filling your spare time directly with time and energy exchanged for more money.
You can maximize your position at work through things like improving personal performance, building strong professional connections, and stepping up to the plate for big and challenging projects.
Of course, you can also combine these approaches, moving from one to another until you find one that clicks for you.
The advantage of doing these things is that they usually don’t have a negative impact on your main finances. Instead, they just introduce the possibility of significant upside for your income, which could mean a massive acceleration of your financial goals if you find success.
Success is not a given in the professional sphere, however, and no matter how hard you try, it’s never going to be as easy as simply buying generic products at the store or installing LED light bulbs to trim your energy bill. It will take a lot of work, a lot of skill, and more than a bit of luck. However, this strategy has no limit to the potential upside.
Sarah and I use all of these strategies to help us maintain a great financial direction now that we’re in a bit of a valley on our progress toward our goals. We have big dreams, but they’re simply not going to happen immediately, so we look for ways to keep us grounded financially as we wait.
If you’re in that same boat – you’ve achieved success with your turnaround but now you’re finding it difficult to be patient as you work toward your next big step – apply some of these strategies. Look at the numbers in a new way. Focus on your behaviors and little choices. Automate everything and live off of a small budget. Find new goals. Work toward a big bump in income.
No matter which of those strategies you use, you’ll find tools that will help you make it through this challenging period and, eventually, you’ll find yourself coming through the other side, reaching that goal that seemed to be incredibly distant not all that long ago.