If you’ve ever tried to lose weight you will know how depressing it can be to weigh yourself each day. Weight loss – especially if it’s going to be lasting – doesn’t happen quickly. From day-to-day, weight loss can be almost imperceptible. So, weighing yourself every day can give you a sense that nothing is changing. Usually, it’s much better to weigh yourself no more than once a week – fortnightly or monthly can be even more productive.
The same goes with many parts of our personal financial management. From day-to-day, little changes, and so in the very short term even the best laid plans can look like they are not having much effect. For example, let’s say you have set up a savings account and you are going to save 20% of your income. Especially if you are paid infrequently, such as once a month, that savings account is not going to change much from day-to-day. You need to be careful that you don’t look at it too often, because doing so can give you a sense that saving doesn’t work – and is therefore not worth the bother.
Another common example is getting rid of debt such as a home loan. Home loans are often intended to be paid off over the very long-term – 30 years or more in some cases. So, even if you are making extra repayments, looking at the balance on a month-to-month basis can give you a sense that you’re not going anywhere, especially earlier in the loan period when most of what you are paying is interest.
That’s why it often pays to set up your system for saving or repaying debt and then let that system run. Some people call this a ‘set and forget’ strategy. It’s much better than it shortened alternative, which is simply dubbed the ‘forget’ strategy.
Another way to avoid despondency is to set yourself small goals. For example, if you’ve just taken on a $300,000 home loan, set yourself a goal of having the balance fall to $299,000 after the interest has been applied. On a $300,000 home loan, over a 30-year period, the monthly repayment is about $1500. Of this, just $200 is principal repayment. The rest is interest. So, it would actually take about five months for the balance to drop to $299,000 after interest has been added. If you are to pay an extra $300 per month, you would achieve your goal of a $299,000 balance after just two months. At this point, you can reset your goal to a balance of $298,000, and so on.
The point is that small wins reinforce a strategy. So, rather than setting a goal that can only be achieved in the medium to long-term (for example, paying the home loan off completely), give yourself the best chance of success by setting a goal that can be achieved more quickly. Do this a few times, and you will have developed a concept of yourself someone who manages their money well.
If there’s one thing we can assure you: well-founded confidence is everything when it comes to managing money. (Confidence that isn’t well-founded? Well, that’s called hubris!)
