We’re in the first week of 2021. This is the week those New Year’s resolutions are being put into action. Making the resolutions last week was easy, but this is the week we actually have to put our plans into action. Not as easy.
If you made a resolution to improve your financial situation in 2021, keep reading!
It can be intimidating and overwhelming to work towards a big financial goal, which is what a yearly financial goal is. All too often we make big yearly goals thinking we can get there because we’ve got a whole year. For many, reality begins to set in around February or March when we realize we’re not making enough progress. Then we get frustrated and give up.
The solution for this: reverse-engineer it. Rather than staying hyper-focused on the big goal, create small actionable steps needed to reach that goal. Then work towards those small actionable steps. The new metric becomes not the big goal itself, but the actionable steps needed to reach the big goal.
Doing it this way is much less intimidating. Every big goal should come with actionable steps needed to reach it.
Since many people are looking to buy a home with more space during the pandemic, let’s use a fictional couple saving for a down payment as an example. We’ll call them Xavier and Jessica.
Jessica and Xavier decided they wanted to spend $200,000 or less on a three bedroom, two bath house. They found a lender that requires a 10 percent down payment plus closing costs. That means they will need to save $20,000 for the down payment, plus about $5,000 in closing costs, a total of no more than $25,000.
To be safe, Xavier and Jessica set a goal of $25,000 to ensure they are not short of the money needed. Their big goal is to have this money saved by December 31st, 2021, which is basically one year from now.
The good news is they already have $19,000 saved from the past couple years, which puts them $6,000 short of their goal. In other words, Xavier and Jessica have one year to save $6,000.
That means they’ll need to save an average of $500 per month. Xavier and Jessica sat down one night and calculated the following:
- They are both getting scheduled $100 pay increases beginning with their January paycheck. Monthly increase: $200
- They currently spend $350 on takeout every month. They are going to reduce that to $250. Monthly increase: $100
- Xavier and Jessica have actually enjoyed staying in more often during the pandemic. They decide they are going to spend $150 less each month on bars and restaurants, even when the pandemic ends. Monthly increase: $150
- Both Xavier and Jessica used to go out for lunch every day. For health and financial reasons, they both decided they are going to bring their lunch three days a week, and go out two days a week. Monthly increase: $150
- Jessica used to be the editor of her college newspaper. She really liked it, so she’s taking on a side hustle with Fiverr as an editor for hire. Monthly increase $150
- Total monthly increase: $750 ($250 more than planned)
Xavier and Jessica broke down their big goal of buying a house into several smaller pieces that looks like this:
| In order to save enough for a down payment on a house we will need to: | o Save $500 per month |
| In order to save $500 per month we will need to: | o Put both $100 ($200 total) per month pay increases into a house fund |
| o Spend $100 less on takeout, put money into house fund | |
| o Spend $150 less every month going out and put money into house fund | |
| o Bring lunch 3 days a week, put $150 saved into house fund | |
| o Side hustle with Fiverr, allocate $150 per month into house fund |
Jessica and Xavier broke down what they need to do into smaller chunks, which we all can do. On the left hand side, they wrote the big goal. On the right hand side, they broke down what they need to do to reach the big goal. Then they repeated the process until they came up with actionable monthly steps that would lead them to the big goal.
Xavier and Jessica can use this chart as a monthly checklist. If everything in the right hand column is checked off, they will naturally reach their goal of saving enough monthly for a down payment on a house.
The small steps are the metric, and the big goal will only be reached if the small steps are completed.
In Jessica and Xavier’s case, they realized they would be able to save even more than the original goal after this process. As a result, they are on pace to reach their goal in 8 months instead of the original goal 12 month goal. They can choose to move up their goal timeline, have extra money at the end of the year for an increased down payment, or hold more reserves. Either option is a win for them.
This type of exercise can be done in any area of life, not just personal finance. For someone wanting to get in better health, they would make a table similar to this.
| In order to improve my health I need to: | Exercise more |
| In order to exercise more I need to: | Commit at least 3 hours per week to physical fitness |
| In order to spend 3 hours per week on physical fitness, I need to: | Exercise at least 30 minutes every day, six days a week |
| In order to exercise 30 minutes a day, 6 days a week, I need to: | Write down my exercise routine for the week |
| Put my workout clothes in a gym bag Monday through Friday so I can go straight from work to exercise | |
| Set an alarm Saturday morning at 9:00 to remind me to exercise | |
| Check off each day that I work out to hold myself accountable |
Just like with Xavier and Jessica’s goal, this fitness goal is simply broken down into smaller and smaller steps. The small steps are the metric. And the big goal of getting into better shape will naturally follow if all the metrics are met.
Reverse-engineering goals is a strategy successful people have been using for years. It’s a way to create immediate action by giving yourself small, manageable instructions. No matter how challenging, any big goal can be broken up into small actionable steps.
Take the time to break down your big goal into small action steps. Then get going on them; I think you’ll be surprised at how much you accomplish this year.
