Financial Big Picture Daunting? Think in Daily Increments
Small victories add up to long-term success
There are some very big numbers hanging over your life. The $1 million or more the retirement calculators tell you that you’ll need. The five-figure emergency fund you so wish you had. The $30,000 or more in your own student loans, and the multiples of that you figure you’ll need to send your own toddler to college.
Yikes! Those are all giant amounts and using lump-sum thinking to understand your financial picture is a good way to amp up your stress so much that you’ll decide to hide under the covers and do nothing. That’s right, those big numbers are demotivating.
So, let’s think incrementally. Daily, in fact, and embrace a steady chipping away at financial goals that helps bring them down to human scale.
For starters, lay out your saving and debt repayment goals. And then to make them a whole lot easier to achieve, adopt these small-item spending habits:
And also these big ticket habits.
Together, those two lists will free up hundreds of thousands of dollars to improve your financial picture. Now you’ve got the wind at your back.
OK, automate your habits. Even bite-size goals will be in danger if you don’t create a system to stay committed. Every bank and every investment firm will guide you to set up automatic transfers.
Got it programmed? Now ignore the big picture. Just stay focused on what you do each day, week, month to move toward a goal. Those are big wins that will serve as motivation to keep at it.
Emergency savings. Yes, you need at least three months of living expenses.
Academic researchers found that people who had downloaded a savings app were four times more likely to commit to an ongoing savings plan when their goal was framed as a daily amount, rather than monthly. If you want to start with a goal of saving $10 a day, you can set up an automatic $70 weekly deposit — or $300 a month — from your bank checking account into a savings account. For better rates on your savings, check out online banks and credit unions.
Debt. For starters, know that your credit card company is playing its own game of “small numbers.” The minimum due each month is a trap. If you start with a $5,000 balance and your card sets a minimum payment at 3%, your first payment will be $150 assuming an 18% interest rate. Assuming you don’t add to the balance, it will take more than 16 years to pay off the debt and the all-in cost (principal and interest) will be near $10,000.
So, apply your own “small” strategy. Commit to a $200 payment — $50 more than the minimum, or roughly $1.80 a day — and you’ll have the debt paid off in less than three years, and the all-in cost will be less than $6,500.
Retirement healthcare. Lifetime out-of-pocket healthcare costs in retirement range from an estimated low six figures to the mid six figures. But those are lump sums. Break it down into annual costs over a 25- or 30-year retirement and it becomes eminently more reasonable/doable. Even if it’s 10,000 a year, that’s $27 a day. (See spending habits above.) More on those health costs here.
Retirement savings. When you’re younger and a retirement calculator suggests you need to save $1 million (often much more) while you’re slurping down some budget-friendly ramen, it seems tragically laughable. But might $10 a day be doable? Save that much starting at age 25 and you will have $1 million by age 70, assuming a 7% annualized return. Can you manage $20 a day? That will get you to more than $2.3 million by age 70.