Posted by Cathy McCabe.
As the new year gets underway, don’t worry if a few of your best-laid resolutions fall by the wayside. The problem isn’t you—or even the resolutions themselves—more likely, it’s the sheer number of goals you’ve taken on.
If you’ve ever learned to juggle, you’ll know how easy it is to balance three balls in the air, once you’ve got the hang of it. Add a fourth ball to the mix, and the risk of dropping them all increases dramatically.
The same holds true for financial goals. You can only focus on a few at a time—any more than that, and you’re likely to drop the ball at some point between now and December. Your hopes and dreams may be infinite, but your budget—and mental bandwidth—are finite. In my experience, three is a powerful number—when I set three goals for myself to accomplish on any given day, achieving them does wonders for my well-being. And when you make no more than three financial resolutions, you can make amazing progress in a single year; over a five-year time frame, you can accomplish things you scarcely believed possible.
The saving technique boomers wish they’d known
59% of 60-to-79-year-old Americans say that if they were given a chance to live their lives over again, starting in their 40s, they’d have saved differently.1
This can serve as a valuable lesson for younger people with enough time on their side to start saving differently—more effectively—than their parents may have done. Like a circus juggler looking back on his career, it’s the techniques you wish you’d learned early on that cause the regret. And cutting your yearly goals down to three digestible essentials is the crucial technique.
Down payment on a first home, a fancy vacation, well-cushioned emergency fund, retirement…these and more may be competing for your attention. Whatever your saving goals, now’s the time to get real and focus on the top three:
1) Bump up your retirement savings by a single percent. Saving for retirement must always be a top three goal. If you have a workplace plan, are you saving 15% of your gross salary, including employer contributions? Perhaps you’re squirreling 8% away, and your employer is matching with an additional 4%—that’s 12% in total. Get one step closer to where you need to be, by increasing your contribution rate a mere percentage point—so small enough you won’t even notice it: 1% of a $50,000 salary, for example, works out to be just $9.62 per week.
2) Build up another month of emergency savings with small weekly automatic deposits. Next crucial question: Do you have an emergency fund? Basically, enough in your savings account to cover three to six months’ worth of expenses—in case you lose your job or incur some big unexpected expense. Maybe you only have enough to cover two months. Goal #2 is bringing that up to three months. Let’s say that means $2,000 by the end of the year. That’s an easily digestible $38.50 per week—set up a weekly automatic transfer from your checking to your savings account so you don’t even have to think about it for the rest of the year. You can always transfer it back if you absolutely need to.
3) Get dollar-specific about your remaining goal(s). You can set a third and final financial goal for the year, think carefully about what’s going to make your life better. (If you’ve already maxed out your retirement accounts and have enough saved for a rainy day, you can set two or three more goals). What are you really looking to achieve? A life-changing vacation, a Master’s degree, or perhaps a down payment on a first home? Remember, you can only choose three if you want a serious shot at success.
Say that Goals #1 and #2 require an extra $50 per week—take a look at your weekly budget and see how much you can realistically sacrifice in pursuit of your dreams and nice-to-haves. Another $50? Will that get you as close to your goal as you’d like to be a year from now? How does it fit in with a five-year plan? (It helps to remind yourself how old you will be five years from now—how do you envisage your life as an x-year-old? You might be renting now but see yourself as a homeowner. If you want to own a house, how much do you need for a down payment? $50 per week over five years will get you to $13,000, not including compound interest. However, $150 would almost get you to $40,000—that’s a 20% down payment on a $200k house).
Just make sure you honor the right goals—ones you can look back on in a year, or 20 years from now with pride in yourself and certainly with no regrets.