Change isn’t so difficult when there is an urgent need pounding on life’s door. The bad report at work, the doctor’s response, a spouse’s concern, or a bank’s notice can all bring a drive for change. But what about when there is no immediate danger?
Addressing areas of our lives that need improvement before an emergency comes can often be the challenge. We think everything is fine, until, well we realize there are not. So how do we adjust without the chaos predating it? This is by no means an exhaustive list, but here are a few things that can help:
Like anything, the first step to addressing a problem is admitting there is one. Personally, I believe the more specific you can be with what you are trying to solve, the better. We need to determine our starting place, where we are now.
Next, we need to determine where we want to go. How will you know you’ve been able to change that area of your life? Depending on the circumstance, this is an easier situation to determine more than others. If your goal is to build up a retirement nest egg, that number is more quantitative than “I want to get closer with my spouse”, which is more of a qualitative endeavor. Quantitative results are a little easier to know when you’ve reached your goal … they are something that can be measured. Many financial goals, fitness goals, some business goals, and many other admirable goals fit into this area.
Qualitative can be a little trickier, but something that may help is by looking for evidence of change. For example, if your goal is to build a better relationship with your spouse, the evidence of that could be you argue less, you’re going on date-nights more often now, you would say you’re enjoying each other’s company more, etc.
An incredibly powerful factor to help with item #2 above is to consider the identity associated with changing that area of your life. For example, if the goal is “I want to get closer with my spouse,” then the identity is “be someone who has a great relationship with their spouse” or “be someone who has a great marriage” or “be a good husband/wife.” You can then ask the question, “what types of actions does [someone who has a great marriage] take?”
This can also be true for quantitative goals, such as a financial goal. The identity question then becomes, “I want to be someone who is smart with their finances,” or something to that extent. Then question #2 becomes the same, “what types of actions does [someone who is smart with their finances] take?” The answers to question #2 will help us build towards the next step.
Knowing the identity and the actions of the identity, we can work backwards from the goal into today’s situation. The more you identify and act upon the habits necessary to build that identity, the more you become the person you are trying to be. And, naturally, as you build those habits and follow through with those actions, eventually you become like that person.
Change is hard. There’s a good chance that no matter the goal you have in mind, you’re going to come up short time and time again along the way. But don’t give up! That is simply part of the process, part of the journey. There is no telling how much you will accomplish if you can learn to enjoy the process of learning and change.
You’re a millionaire! That sounds pretty nice, right? Too often when we think of millionaires, we think of lottery winners, professional athletes, movie stars and the like. But what if I told you it’s entirely possible for an average individual just like you and me to hit that milestone?
First off, we must understand that very few people wander into success. The championship-winning team prepares. The top salesperson does their homework and due diligence. The best teacher continues to be a student of their topic.
Success with money is no different.
What’s this mean for you? It’s quite simple, really: if you want to succeed and achieve X goal, you’ll have to prepare for it. In my opinion, the best way to achieve any goal is to think about it, then work backwards to see what must be true to achieve it.
Let’s say you’re 30 years old and want to be a millionaire by the time you’re 50. For the record, by “millionaire” I mean someone whose net worthis $1,000,000. With 20 years to knock out this goal, we can work backwards to see how this can be achieved.
First off, let’s say in the next 20 years you work to purchase a home and have it paid off. Now I know real estate prices in the last couple years have gone absolutely bonkers and I’m not going to pretend I know what that market will do in the future.
According to Statista, the average new home sales price in the US from 2014 to 2021 is $384,6501. Now that’s an average, so some homes will be higher and some will be lower, therefore, we’ll take a conservative approach and say your home is worth $300,000 after you’ve paid off the entire mortgage in twenty years. That is a +300k towards your goal of $1,000,000 and you only need $700,000 to go.
With your home paid off, the next best option is to grow your assets by investing. This may or may not be with the help of a financial advisor or expert, but unless you plan to sock away a literal $700,000 in your mattress or savings account over twenty years, you’ll need to do some sort of investing.
According to the US census bureau, the average household income in the United States for 2021 was just under $71,0002. If you were to invest 15% of $71,000 for 20 years, you’d be looking at $10,650 a year, or roughly $888 per month (for simplicity, we’re going to run this calculation as if you currently have $0 dollars invested. If you do already have money invested, even better!). We’ll use the S&P 500’s lifetime average return of just below 10% annually3, according to Investopedia. Again, this is an average return, where some years are high and some are low. Depending on rounding used in the calculation, you’ll get somewhere around $658,000 invested so we’ll use $660,000 for easier numbers. Now we’re looking at roughly $960,000 in assets.
Now you might be thinking: Aaron, I can’t invest $888 a month! That’s crazy. How will be able to achieve this?? Well, here’s how: the first step is get on a written plan (aka, budget) for your monthly income and get control of your spending. Second, if you have consumer debt (basically anything that’s not a mortgage), get it paid off as quick as you can. Make some sacrifices here: stop going out to eat, pay off your car loan (or sell it and get a more affordable car), cut out some subscriptions, make fewer trips to Starbucks, pick up that extra shift, maybe start a side hustle, sell some stuff you haven’t used in years that is sitting around collecting dust. Just get that debt out of your life, then you can invest intentionally and purposefully. I don’t mean to be the bearer of bad news, but I do want you to know that only investing 3% into a 401(k), even with an employer match, may not build the nest egg you’re hoping for.
I’d also like to point out a couple things with the above calculation for investing. First of all, it was using a $71,000 per year household income. Over the course of 20 years, I sincerely hope you’re not still making the same amount from age 30 to age 50! And since the amount invested per month is based off a percentage of your income, as you make more, you also invest more. If you’re already making more than $71,000 as a household, you’re ahead of the game. If you’re not quite making $71,000 right now, please don’t fret– we just said it would be unrealistic to believe you wouldn’t get a raise over the course of 20 years.
Secondly, we are not including any form of employer match in this calculation. Why not? Well, because you can’t control that. Maybe your work policy changes. Maybe you change jobs and the match changes. Maybe there’s a pandemic and workplaces pause matching retirement contributions. Regardless, you can’t control what your employer does concerning additional contribution to your retirement plan. By all means, please take advantage of this opportunity when you can! But let’s count chickens after they hatch and not put great reliance on what someone else does for your finance success. If your employer does match, your investment position will be even better than what we are calculating here.
After investing for twenty years, we’re forty thousand away from our millionaire benchmark. To be clear, this $40,000 gap will probably be jumped via the investments by (hopeful) raises over as time goes on and/or employer matches to your retirement. However, in case it isn’t, let’s say you have some rainy day funds sitting in savings (not invested) in case you need it. Three to six months of expenses is an ideal number for this, and it will vary from household to household. For this example, we’ll say that’s $18,000. Now we are $22,000 away from your goal.
By the time you’re fifty, what are the odds you have other random assets that accumulate to over $22,000? My guess, pretty high. If you are taking care of your vehicles and on a regular plan to buy and replace them (without going into debt), it’s very possible you have $10,000-$20,000 of assets in vehicles (please note these usually go down in value, though, not up). Maybe you have a few thousand dollars in technology assets, such as high power computers (these also generally go down in value), or maybe you have a hobby collecting something specific and accumulate some value there. We have a lot of options for this part!
And just like that, in a twenty year time span, we worked backwards from a goal and came up with a plausible solution a $1,000,000+ net worth. Again, by “net worth,” this assumes you own these assets and do not owe any debt to anyone. If you do, we would need to subtract the amount you owe from the calculation.
We were also able to calculate this amount using figures that aren’t unbelievable; actually, we calculated you wouldn’t see a raise for 20 years! Neither did we say you had to win the lottery, catch a “big break” like an inheritance, or become a celebrity to achieve it. This was just math based on information for our time period, put together with a plan to have a better future.
Now it is true that your situation won’t look as simple as this. Mine won’t either; life doesn’t work that way. However, this is a framework and a plan that can succeed as long as you prepare and follow through.
This last week, I had the opportunity to discuss personal finance with a few individuals. One was a gentleman in his mid-twenties.
Last year about this time, he was beginning to look for a new housing arrangement. I helped him create a budget with the goal of finding out how much he could afford for rent. Fast forward to this year, he is in a good housing situation, he has paid off thousands of dollars of debt, he knows where his money is going each month, and has a plan for financial success. Though if you had asked him before he and I talked, he would have told you he did “pay attention to his money” and that he used a budgeting app.
In similar fashion, a couple had their first coaching session with me this week. They have been married close to twenty years, and would also tell you they paid attention to their money and used a budgeting app. However, much like the gentleman mentioned above, this application focused on where money went — not where you wanted money to go. In our session, we created a created a budget looking forward — giving each hard earned dollar of income a name and a job to do for the upcoming month. As we wrapped up the coaching session, the couple was very pleased to have a plan that puts them in the driver’s seat of their finances.
In both cases, the switch from “tracking” to actual “budgeting” was an instant change in their perspective. I often tell my clients, “money is a great servant, but a terrible master.” Money is a great tool when put to good use. When we do not give our money allocated amounts and specific tasks to accomplish, it costs us the ability to make specific, planned, intentional progress. Afterall, very few people “wander” into success!
When we do not give our money allocated amounts and specific tasks to accomplish, it costs us the ability to make specific, planned, intentional progress.
Please don’t get me wrong, tracking your spending and having those expenses categorized is a great start, and it is a part of the process, but it is not budgeting. A budget is a plan with your resources towards desired results. If you are not thinking ahead with your finances and later looking at the money you spent, that is a lot like looking behind you while trying to move forward. Looking back has its purpose, but that’s not the way to get where we want to be!
If you’re wanting to get started making progress with your money goals, I’d love to talk with you. Use this link to find a time that works and let’s get started!
New year resolutions and goal-setting are great. We all have areas of our lives we know we should improve, and definitely things we would like to improve. But how do we know we are setting good goals? What should we do if we’d like to become better versions of ourselves, but we aren’t really sure where to start? And then, how do we continue with it (since it seems like everyone believes new year resolutions are a great way to not change anything)? Well, 2022 is here, and a new year is a great time to start setting some objectives and get working on improvement. If you have not already done so, it’s time to consider some of your goals for the new year!
I’m a huge fan of goal-setting. I’m an achievement-oriented person, so the idea of setting goals (usually broken-down into smaller goals) “clicks” with my mind so well I follow goal-setting processes almost naturally. However, a tricky part can be how to start.
Arguably, step one is considering “what should I improve with my life?” The fact you are reading this post and have made it this far, I’d say you can check that box. Step #1 is done — well done, my friend. You’re off to a great start!
The next area is a little more difficult but thankfully, some other people who are very good at goal-setting and thinking about such topics have laid some ground work for us. In the book Born to Win, Zig and Tom Ziglar write about an ideal called “the wheel of life.” They later describe seven areas of life we in which should constantly trying to improve to be “10s” in all areas (on a scale of 1-to-10, ten being the best). The seven areas are as follows:
Career
Financial
Spiritual
Physical (health)
Mental
Family
Personal1
Some of these are pretty straight forward, others take a little more consideration. For example, “mental”, in part, means learning and growing as a human being. A question to ask yourself here is, “how can I continue to expand my knowledge and keep learning new skills and information?” Personal is another dynamic area, as part of it is having healthy interactions with non-family members.
Some areas you are probably better at naturally, and others are not so easy. I know this is shocking, but as a financial coach, the “financial” area is pretty easy for me to work on. I’m not a very social person, so I have to be intentional on getting together with friends — a key part of the “personal” category. Some people are really good at taking care of their bodies, so naturally the “physical” area isn’t too challenging for them. For others, this is an area of struggle. I encourage you to take a few minutes and think about each area and where you are now.
Seriously, like…. take a few minutes and think about it. Come back when you’re done — I’ll be here 🙂
Great, now that you’re back (or if you didn’t move at all… ), let’s thinking about where you want to be. If you’re “4” on the scale of an area, but you’d like like to be an “8”, that can be an intimidating gap! It’s so tempting to stop right there. To give up and “ugh, that sounds so hard… I probably wouldn’t succeed anyway, might as well not even try.” Please, don’t do that, my friend! We’re just getting started!
You see, the “trick” (for lack of a better term) is not about getting from 4 to 8. That’s the overarching goal and should be kept in mind, but we know we can’t leap that crevasse right at the beginning. If you’ve never used a bench press before, you’ll probably start with just using the bar — we don’t need to stack three 45 lb. plates to each side right away. That won’t do any good.
We start by looking at “how do we get from a “4”, to a “5?” Or maybe even, do we get from a “4” to a “4.5”? How do we progress at all? How do we move even the slightest bit? Because that builds confidence. That builds momentum. That builds desire and eagerness to go even further!
Even though New Year’s Day has passed, I hope you are still thinking of ways you might improve yourself this year. Truly, I am not a big fan of “resolutions,” but I am a fan of constant improvement. And you, my friend, are worth being the best version of you possible. You deserve it — and the world needs it.
Best wishes to you on your goals for this new year. And if you found this post helpful, share it with a couple friends or on social media, along with two or three of the goals you plan to pursue this year. Maybe you’ll inspire someone else to commit to their goals, as well.
1: Ziglar, Zig, and Tom Ziglar. 2017. Born to Win: Find Your Success. Issaquah, WA: Zig Ziglar Inc.
Have you ever been to a restaurant or had a meal in which there was a “secret sauce”? Something special, something unique, that identifies that menu item more as an experience than just another bite to eat? Well, in the finance world, there is a secret sauce that is absolutely amazing and I honestly can’t believe it’s kept on the down-low from so many people.
What I am talking about here is a concept called “The Time-Value of Money” (TVM). A very similar idea to it is compound interest, and that one usually rings the memory bells of more people. However, I’m finding many individuals don’t really understand just how much the TVM can benefit them nor what it means. I hope you’re ready for a delicacy, folks, because we’re about to open up that secret sauce.
The basic construct of the TVM is that “a dollar today is worth more than a dollar tomorrow.” (I would cite a specific source here, but honestly this is in almost every finance/accounting textbook known to man and it’s pretty clear I’m not the creator of this concept, just a curator.) Essentially what it means is that if you have $1 today, you could theoretically invest it for a 10% return (10% is just for the sake of easy numbers in the example), and in a year that $1 is now worth $1.10 a year from now. $1 x 10% = $0.10. Add that to the $1 you already have and boom, $1.10. Easy peasy.
So why is that $1 today better than “a dollar tomorrow”? (More accurately it’s better than $1 dollar a year from now. The day-to-day change is minuscule, therefore this is easier to see when we think in terms of years.) First step: how much is a dollar “tomorrow” worth? Well, that question is answered by figuring out how much we would need to invest today to have $1 in a year. Keeping things equal from above, assuming we get 10% return each year, that number is roughly $0.91. Now you tell me, which is better: $1 today, that turns into $1.10 in a year, or $0.91 that turns into $1 in a year?
By now you could be thinking, “Ok, Aaron, I get it. $1 now is better because it can be invested. What does that have to do with being the secret-sauce of the financial world?” Good question! Let’s say you leave that $1 from today in the market for a year, now it’s worth $1.10. But why stop there? Let’s leave it in the market another year for another 10% return. Now that $1 today is worth $1.21 in two years. In three years it’s worth $1.33, and in four years, $1.46. Think about that. Forty-six percent overall growth on your investment in 4 years. Not a bad ROI if you ask me.
Why is that important? Because as we saw above, this is compound interest at its finest and more importantly, it is compound interest working for you. We use $1 for simplicity sake, but instead, let’s use $1,000. At our same percentages, that $1,000 becomes $1,100 in a year, then $1,210 then two, then $1,331 in three, and $1,464 in four years.
Ok, enough with the little examples. Those numbers are small potatoes. How can we use this knowledge and get some tasty enjoyment of this secret sauce? Check it out:
The median household income in the United States for 2020 was roughly $67,5001, but we’ll go with $68,000 for ease of numbers. If you were to invest 10% of that income per year ($6,800 per year) in monthly increments (~$567 per month), you would have $7,120 in a year (assuming 10% growth rate, like we did above). But we’re not done yet! Let’s say you’re really feeling the juice on this stuff and leave it in for 5 years, all while consistently adding $567 a month to keep the investment machine rolling. That puts us just shy of $44,000 (if you wanted to know, it’s $43,881). You invested $6,800 for 5 years ($34,000 total) and you’ve got nearly an extra ten grand? Not a bad gig.
This is the part where I get really excited. I’ve said it before and I’ll probably say it thousands of more times, but the biggest factor of the TVM is time. Let’s say you are in your early 30s and looking to retire in your mid-60s. Using the same household income from above, let’s run this out for 35 years and see what happens. Ready? Ready?? It’s over two million dollars. $2.15M, actually. Oh, and by the way, you never changed your annual investment amount. Which means two things: 1) you should have probably looked for a new job because you didn’t get a pay raise in 35 years, and 2) you put in $6,800 a year, over 35 years, for a total of $238,000. The rest of that is all growth, my friend. Nearly 10x growth, and we didn’t even consider if you already had money saved for retirement or talk about an employer match. Tastin’ the secret sauce, yet?
The biggest factor of the TVM is time.
In case you didn’t think it could get any better, it does. When I coach people for their personal finances, we usually run this model out investing 15% of annual income, not just 10%. Would you like to know what happens for a $68,000 income that invests 15% over 35 years on a 10% average growth rate? It becomes nearly $3,250,000. Mmmmm… saucy.
So what does this look like for you? Well, because this is a blog and not a face-to-face conversation where I can show you my fancy-schmancy Excel worksheet (kinda makes me sad, I love showing people my cool Excel worksheets), I’ve got the next best thing: add the fancy-schmancy function to the blog post! You can run all sorts of scenarios in the below table to satiate your curiosity.
After checking out those numbers, some of you are probably pretty freaking excited. In fact, you might have started looking for some investment professionals now. That’s awesome, but let’s hold the Google search for just a moment. Some of you checking out those numbers may realized a couple things: maybe retirement is a lot closer than 35 years, and you don’t have a whole lot saved. Maybe your annual income figure looks impressive, but you’re living paycheck-to-paycheck and there’s no way you can invest 15% of your income on a monthly basis.
First of all, if you are struggling, I want you to know you are not alone and there is a way out. It may take some time and effort, but you can build a legacy and you can sort out whatever the mess is. These stories don’t make the 6 o’clock news or get millions of clicks on social media, but people do it every day. You can, too. The first step to any of this is getting on a budget, followed by getting out of debt and building up an emergency fund. There are many resources out in the world for all three of those things, but if you’d like some help and talk to a real life person who coaches people with their finances, you can schedule a free consultation with me here. Let’s get you on the road to winning.
My friends, the secret sauce of the finance world isn’t that complicated, and it isn’t for a select few. Anyone can do this; everyone should do this. Please note to do this well, you may need help from a professional investment advisor. If you are not sure who to trust with something like that, talk to few different ones and look for someone who teaches you the process and wants you to understand the entire situation. If you’re still not sure who to go to, contact me. I’m not an investment professional, but I know quite a few who would be more than happy to help you.
Not to freak anyone out (or perhaps you already know?), but Christmas is six weeks away at the time of this writing. For some of you, that just created a stress-induced panic but stay with me here: a little preparation can go a long way and this is absolutely no different.
End of the year holidays are great. The food, the get togethers, the food, the office parties, the food, the gift giving, and obviously, the food (I like food). There are probably a few folks out there that celebrate these holidays (or wish they could) nearly every month, but for most of us, things like Thanksgiving, Christmas, Hanukkah, or Kwanza are really once a year ordeals. That means these are events normally outside the standard monthly budget (if you don’t have one of those, let’s talk — budgets save lives). Just being honest here, folks: end of the year celebrations can get expensive quickly. Over the last two years, Americans have spend nearly $1,000 hard-earned dollars on Christmas celebrations alone1. I can’t say for you, but an extra $1,000 expense in a single month’s budget is going to hurt — a lot. Or, for some, it may come from savings; for others, it might hit the ‘ole credit-card and you could be paying for Christmas until that tax refund comes in the spring.
None of those options sound great to me, and I hope your brain is telling you the same thing. There has to be a better way, right? Well, that’s where preparation comes in. I know it’s November so maybe this post is about 4 weeks too late, but better late than never when it comes to finance prep. So here’s the deal: we want to break up that $1,000 expense (or whatever that number is for you) so that it doesn’t put a crater in December’s budget, the savings account doesn’t take a hit, and obviously, we don’t go into debt. It’s gonna be a cash-flowed Christmas, everyone! So let’s get started.
Step 1: we need to figure out how much we plan to spend (*cough cough* budget *cough*) on these holiday events. There’s so much extra in these months it might be helpful to break them down into categories such as Thanksgiving: Food, Thanksgiving: Travel then Christmas: Gifts, Christmas: Travel, etc.
Step 2: Time to estimate how much you are spending per category. Yes, that means listing out for whom you are getting gifts (hmmm I wonder where that idea could come from? A jolly old gentlemen in a bright red suit, perhaps?), and the associated planned amount. Total up those amounts at the end and you have your number for that category. Easy-peasy. Do that for all holiday categories you made, and you’ve got your overall goal.
Step 3: Break up the overall goal from Step 2 into sizable amounts across November and December. Maybe it’s 50/50, maybe November can handle 25% of the projected amount and that’s enough relief for December to be just fine. Use whatever split works best for your and your situation.
Step 4: Execute. Track your spending (the EveryDollar budgeting app is phenomenal for this), make adjustments when you need to. Call me crazy, but I’m willing to guess you’ll end up spending way less than you would have had without planning because you are paying attention. Which means you’re looking for great deals, you’re getting great deals, and you’re saving some hard-earned cash, too. Win-win-win (triple win, nice).
A couple other things to consider is how the festivities will impact your regular budget line items. For example, if you are tracking Thanksgiving food expenses explicitly, it’s very possible your normal grocery line item isn’t the usual amount; it may even be lower, especially if you plan to spend time away with family for a handful of days. Additionally, if you are tracking Thanksgiving travel separately, your budget item for regular things like fuel for your car could be different.
There you have it, folks. It is a great time of the year and a busy time of the year. Don’t let the lack of preparation cause more stress around the holidays and distract from the celebrations around you.
Principle-based living to win with finances can be a challenging topic to fully grasp. The good news is, many people have written some great books on living out your values and principles! Not all of these will directly mention personal finance, but that’s the beauty of principle-based living: it does not have to be mentioned directly for the wisdom to still apply. Here are some of my favorites that encourage such living:
The Seven Habits of Highly Effective People by Stephen R. Covey
Boundaries by Dr. Henry Cloud and Dr. John Townsend
Good to Great by Jim Collins
The Total Money Makeover by Dave Ramsey
The 5am Club by Robin Sharma
Start With Why by Simon Sinek
These are a few to get you started, so be sure to check back here for updates to the list. If there are any great books you think should be included here, please let me know and I just might add it in!
