A few years back we got interested in financial independence, the ability to no longer have to trade time for money. We wanted to focus more on the things we value which are time, family, security and independence. The goal of becoming financially independent was overwhelming and seemingly impossible. At that point in time, it was so far off and we didn’t really know what we were doing. Where do you start? Would it take 20 years? What was our savings rate? We didn’t know but we used the goal of financial independence as motivation to start tracking savings rate and net income and reduce spending.
Small changes over time can equal big results. Set your large goal and break it down into smaller actionable, achievable pieces. Large goals are overwhelming and lead to inaction, frustration, and failure. Goal-setting experts called this the difference between outcome goals and behavior goals. Outcome goals are based on the end result like losing 50 pounds or having $1,000,000 in your account. They are often outside your sphere of control. There is nothing you can do by yourself to make it happen. Behavior goals are based on actionable behaviors that you do have control over. A behavior goal for losing 50 pounds might be going to bed 30 minutes earlier every night so that you can wake up earlier and work out before work. You have control of the behavior and it hopefully puts you on the right path towards the outcome that you want.
Experts say to break down your outcome goal into yearly, monthly, weekly, and daily actions. This is really good advice to break it down into bite-sized pieces that allow you to take action. Reality is that taking daily actions is easier said than done. Other life responsibilities sometimes take precedence over these actions. There is also only so much will power to accomplish everything. One of the things we found most beneficial was automation because we didn’t have to take action. We automated 401(k) contributions at the beginning of every year. We also set up our bank account to automatically pull money straight into savings accounts that we had earmarked for specific things. We automated investments out of those savings accounts. Essentially we were able to live on our initial starting salary because what actually came into our checking account stayed the same for years. Automating all of this allowed us to focus on other really important things. The automated system was way more important than following daily behavior goals.
After three years tracking our income and spending we were able to see the trend towards being financially independent (according to a spreadsheet) in 7 years at the start of 2017. We were seeing results from our financial automation but we knew we could still improve.
Using SMART goals is a way to write goals that are specific, measurable, achievable, realistic and time-bound. A stretch goal is something that you won’t really be able to achieve without making a larger change. Stretch goals are meant to be difficult to achieve even if you make a large change.
We were looking for additional motivation so at the beginning of 2017 we set the stretch goal of paying off our house in 5 years down from 7-10 years. To pay off the house in 5 years we would have to make large changes. We pulled all of the lower of our two incomes into a specific savings account and some extra from our other income and paid extra principal every week. For us, it was really motivating to see the principal on our mortgage decrease every week. Three-quarters of the way through 2017 we were able to start paying off the mortgage even faster because of more steady income at a new job.
When we started trying to pay off the mortgage in 5 years it was a stretch goal. We didn’t think we could actually afford to do it. By spending less and making more we were able to accelerate paying off the mortgage. We didn’t have to change our retirement investing but we did reduce the amount we were putting into index funds to put towards the mortgage. In 2018, we are continuing our focus on paying off the mortgage with a new smart outcome goal of paying it off in 2 years, 2018 and 2019.
Examples to demonstrate the difference between SMART and stretch goals.
Make an extra mortgage principal payment every week that we receive a paycheck in 2018.
Pay off the remaining mortgage principal in the first half of 2018.
The first goal is a SMART behavior goal. We get paid alternate weeks, money from each paycheck goes towards the mortgage. Doing it this way makes a long term slow process into a weekly habit that is also motivating and broken into smaller chunks. These payments are in addition to the monthly principal payment.
The second goal is a stretch outcome goal. We will not be able to pay off the mortgage without large changes and selling other assets. This requires that we evaluate pretty much everything that we are doing. We need a different strategy if we really want to achieve this stretch goal.
Here are some questions we need to answer. How fast can we pay off the mortgage? Can we do it this year? What would we have to sell? How much less could we spend per month? What would we invest in after it was paid off? How would our investments change if we sold now?
Why are we focusing on paying off our mortgage instead of investing in the market? Why invest in an illiquid asset (personal real estate) over an index fund whose return could potentially provide income in the future?
Making tough choices like this is part of life. You have to decide what is important to you and decide what you are going to prioritize. We use the statement, “We choose to do A even over B” as a way to determine what strategy to follow.
Saying we choose to pay off our mortgage even over investing in an index fund makes it our strategy. There is no question that we made this choice for us. We understand that there are trade-offs, we weighed the trade-offs and we made a choice.
What’s your financial goal? Determine if it is an outcome goal or stretch goal and use behavior goals and SMART goals to break it into manageable pieces.
Example: Outcome goal: Pay off student loans. Stretch goal: Pay off student loans in 3 to 5 years. SMART goal $100 extra/month every month in 2018. Behavior goal. Save $25/week by packing lunch 3 days a week.
Make the tough choice to prioritize one good thing even over other good options.
