This post is from staff writer Honey Smith.
Ever since I paid off my consumer debt, I have been thinking about setting my next goal. Obviously paying off my student debt in its entirety is the long-term goal, but that is going to take years. And years.
For me, having a goal that long-term feels psychologically similar to saving without a goal. To keep myself motivated, I think it’s a good idea to pepper the road ahead with short- and medium-term goals as well.
Step 1: Getting in touch with my feelings
I didn’t want to set a goal impulsively, however. I know I’m the type of person who, once I’ve got my eye on the prize, sticks with things long after I probably shouldn’t. Case in point: going to grad school for eight years to earn two degrees that aren’t very lucrative. This time around, I want to think about things ahead of time, rather than after the fact. I want to be Prometheus instead of his twin brother, Epimetheus.
So I paid attention to how I felt after having reached one major milestone. As it turns out, the thing I enjoy the most is the effect improving my cash flow had on my mental state.
Not that I’ve stopped meticulously tracking every penny I earn. I continue to track not only because I am still not financially comfortable, but also because I kind of geek out over spreadsheets. I am one of the weird ones who enjoys the budgeting process (if only I had discovered that about myself years earlier!).
The thing I enjoy about positive cash flow is that I have more freedom to choose what I do with my money. To put it another way, having the opportunity to make the responsible choice grants me more agency than being forced to make the responsible decision. The side effect of feeling like I can take the credit is that I am happier about my decisions. This gives me the motivation to make even more good decisions.
That, then, is my starting point. The better my cash flow is, the more in control of my destiny I feel and the happier I am. As a result, I’ve decided to make my short- and medium-term goals with an eye towards improving my cash flow.
Step 2: Setting the short-term goal
My first major victory in gaining control over my finances was two-pronged: I lowered one monthly bill (by changing my insurance coverage), and eliminated another monthly bill (by paying off a debt). So for my short-term goal, I decided to examine my ongoing monthly bills to see if any could be lowered.
Because I followed El Nerdo’s epic tale of his search for the perfect cell phone and plan, the thing that immediately sprung out at me when reviewing my own monthly spending was my cell phone bill. At some point in the distant past, I signed up for a plan with unlimited data and 450 anytime minutes, to the tune of $68 per month after my employee discount.
Unacceptable!
I logged in to review the details of my contract (which, note to self, was also instrumental to lowering my life insurance payment). As it turns out, my current contract is up on November 28. In just a couple of weeks, I will be able to switch to any carrier I want without paying the $350 early termination fee. Huzzah!
I then investigated a variety of no contract carriers. However, it turns out that El Nerdo had done most of the work for me. While his initial choice turned out to be insufficient for his needs, 300 minutes per month plus unlimited messaging and data is right in line with my current usage.
And because of the money I’ve saved as a result of my previous success, I can pay for the new phone (required to use this carrier) with cash. Lowering my cell phone bill from $68 to $35 improves my cash flow by $33 per month. Once again, huzzah!
Step 3: Setting the medium-term goal
After getting clobbered with a “debit adjustment” that pretty much negated the reduction in my interest rate when my Special Consolidation student loan took effect, I decided my $5,352.61 student loan balance was the perfect medium-term goal.
Getting that balance out of the way will free up $77.52 each month (the current minimum payment). When combined with the proposed savings from switching to a new cell phone contract, that’s over a hundred bucks a month! Now that’s what I call a SMART goal.
After the difficulties with my Federal Direct Loan, I was a little nervous about applying extra payments to my non-consolidated account, which is with a different servicer. However, I was so motivated after identifying this debt payoff as a possible goal that I decided to run a small experiment.
A few weeks after my September payment went through, I scheduled an extra payment of $100 through my servicer’s online interface. I assigned the payment to principal (rather than as a pre-payment of the next month’s bill, which was also an option). Then I waited to see whether the extra payment would be applied according to my request and whether my Kwikpay October auto debit would still be deducted normally. Score on both counts!
Step 4: Impatience and implementation
As I’m sure you’ve noticed, it will be a couple of weeks before I can move forward with my short-term goal. Additionally, I need cash up front to achieve that goal. Also, the holidays are nearly upon us. This means it will probably be January before I can start aggressively implementing the extra principal payments required to meet my medium-term goal (though I do plan on making some additional extra payments in the meantime).
How can I harness the power of patience while I wait for the timing to be right?
In fact, this is something I’ve struggled with since focusing on financial responsibility in earnest. In my spare time I play around with my spreadsheet, plugging in future income and expenses through the end of the year using a variety of scenarios. Every other Friday when I can send off my payments I am so excited, but then it feels like ages will pass until the next direct deposit.
It’s been asked before, but how do you encourage yourself to stay the course when you are in between the high of your debt payments? I know slow and steady wins the race, but what is that turtle thinking about while he plods along?
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Each person has a different thing that keeps them fired up to stay the course, and for me it was the stock market crash in October 1987.
Being a graduate student in corporate strategy at the time, I was on an intellectual crusade against the utter stupidity of big companies forming these unwieldy and money wasting conglomerates. And one conglomerate in particular’s stock got squashed like a cabbage leaf that day. It was called Allegis, and it consisted of Hertz, Hilton International and United Airlines. (Bet you didn’t know that those three were once part of a single company.) Anyway, as much as I hated that company I knew, I just knew, that the market overreacted and crushed the company too hard, and that the stock would bounce back and double in the wink of an eye.
And I didn’t have money to invest to benefit from that doubling. The only way to get there was to get rid of our debt and save. (After getting out of school, of course.) It took a while to get there (story chronicled here about two months ago) but we did.
But that event provided the fire in my belly to stay the course. Especially when subsequent events vindicated my judgement: the stock did rebound handily, and the corporation eventually sold off those disparate business units.
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@William — I like this story. Any investments you were “sure about” at the time but didn’t have the money to invest, only to realize later it was a blessing in disguise? Sometimes the missed disasters can be just as instructive.
@Honey — Welcome to the slow-drip debt reduction club. It can take a very long time to reach the medium and long term goals. I only update my debt reduction charts once or twice a year. I keep a journal with all of my various goals, tracking my debt reduction along with my long term investments, so I can see the liabilities shrink while the assets grow. It’s funny to see though — cars that were paid off a few years ago, credit cards that were paid off seven years ago, student loans substantially reduced, remaining balance on my mortgage shrinking, 401K balances slowly rising.
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I suggest you do other, non-financial things in your spare time. You admit you’ve become a little obsessed with the repayment schedule. Stop spending so much time fiddling with your spreadsheets and concentrate on other avocations (those that are free or very low-cost). This might eventually lead you into another income stream that will help you pay off the debt that much faster. At the very least, you’ll perhaps have a saner, better-balanced life.
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I second that the turtle finds other activities within it’s sphere to have fun with while waiting. It doesn’t have to be money or cash flow driven, but maybe something to improve skills, activities to explore, etc.
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I agree. You have done such a great job. You should reward yourself with some free or low cost outings or something.
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Funny thing about getting rid of debt. You get so used to not buying stuff, that you quit buying stuff, at least the way you used to. I have friends who are going out to eat, or ordering in pizza the day before thanksgiving. I have just gotten out of the habit of spending money I don’t plan on spending. Yet life is still quite complete and fulfilling.
And Karen is truly correct about the book “Your Money or Your Life”…
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I should really focus on my fitness! The weather’s lovely for biking this time of year…
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Once you achieve a goal it’s easy to become complacent. Once that sets in, you can slowly slip below where your original goal was. Whenever I find myself about to achieve a goal with my finances I immediately set a new one to make sure that I can continue the progress.
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I have to do the same thing with my goals. I also find if my goal is too large, such as “Pay off the mortgage”, I get overwhelmed. I alter the goal to be “Pay off $10k of principal this year”. Breaking it into smaller chunks is more motivating and achievable for me.
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Whenever I’ve had a larger debt to tackle on of the strategies that’s worked for me has been to set my short term goals for certain chunks of the debt. So if my total loan is $20,000 I’ll set my shorter term goal at getting that down to $15,000 and so on. That way I’m still making my short term goal, while working on my long term one.
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I’m with Sheryl, when we were killing our unsecured debt, $55,500, paying off the first 5 debts was easy because we made such good progress by killing them within about 6 months. Then we we had one big debt to go, Mr. Sam’s student loan debt from his MBA, and it was slow going. I found it helpful to work to get our debt below certain numbers, i.e.$25,000, $20,000, etc. We made those round numbers short term goals.
Also, I found staying obsessed with personal finances to be helpful. Tracking, charting, writing about our finances helped us kill the debt and it has helped us going forward to save big money each year. We also talked about it, the debt, regularly, we had meetings/discussions, etc. Yes we did become obsessed that first year, but all that talking, plotting, and yes some arguments, helped us figure out how we were going to manage our finances going forward (our big debt paydown was in our first year of marriage).
I don’t remember your list of debts but I found snowflaking, sending off little payments, to be extremely motivating when we were killing our debts. I’m not as good about it with our savings.
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I’m the same way with my car loan – currently $7k @ 2.9%, down from $10.5k when I got it 14 months ago. It seems like it takes forever for the 17th to come so I can check my online statement, and even longer for that automatic payment to go whizzing out the door. It’s even harder to know that I have the money in the bank to knock it down by half if I wanted to. But then I wouldn’t have the fluidity that I want when I finish grad school, to be able to take a little time off or be able to move for a job.
I did recently increase my overpayment another $50, and I plan on putting half of my next tax refund at it, but it still gnaws at me. I keep telling myself that once it gets down to $2k I’ll just pay off the lump sum. Plus it’s my first car loan, so I’m diversifying my credit history over a longer period of time.
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@JenniferG – As someone who is much further down the FI road (read: old), I’d suggest that you do NOT plan to pay that car loan off early. Assuming you have no other consumer debt, of course. You will benefit in the long run as you develop your personal credit history. At 2.9%, you might think about paying it off exactly as scheduled and building up your savings instead. Much more freedom in a fat savings account balance than a paid-off car (assuming a cheap and affordable rate/payment).
This is a little counter-intuitive, but as a smart consumer, you will not have as many opportunities to build your credit score, because you won’t be charging up a storm on credit cards, opening installment loans, etc. Milk this loan for all it is worth to improve your credit score and save like mad so you can pay cash for your next car. You might not ever need a car loan again and a good score will come in handy when you are ready to buy a home.
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Honestly, I can kind of relate. We are consumer debt free and are in the process of paying off our house. It is boring and the payoff date is so far away that it is hard to get too excited about. We have stayed on track so far but making the payment each month is pretty anti-climactic.
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This is where I am now. It’s hard to be motivated when the balance comes down sooooo slowly.
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I am a graph addict. I like to take a look at my graphs between scheduled payments, and see where I am compared to where I planned to be. I like to “beat” the line for where I planned to be, so I make small payments whenever I can.
For example, I budget $60 for a new work outfit, but through waiting for a sale and using a coupon, I get it for $45. The extra $15 goes to the Consolidation Loan that same day! And if I ordered it online and got a $1.50 rebate through ebates, well, as soon as the rebate pays out, it goes against the loan too! (Of course, sometimes there is a limit to how small a payment you can make, so you would have to save up those little bits, but there isn’t a limit on my particular loan.)
I admit, these are pathetically small “wins”, but they make me happy all the same, and I can see the progress on my graph.
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I don’t really know how to make charts, but learning might be fun!
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I can totally relate. I am also addicted to my spreadsheets and budgets. I plan out my income and payments several months in advance and get a great sense of gratitude when I send all the money off to their budgeted locations. I have estimated bills and debits through 2013 and I am using the “personal escrow” strategy for that.
Short terms goals are key to help keep me on track. My most recent short term goal has been to get more involved with investing (another section in the spreadsheet yippee). Starting small right now with index mutual funds, but as I learn more I plan to get involved in other investments.
Another short term goal was to get my wife on page with our budgeting strategy, which she is slowing coming around too. She’s a little skeptical of the personal escrow thing, but work in progress.
Has there been any notion on this site about sharing spreadsheet templates or budgeting templates? (No numbers involved of course) I’m always interested to see how others create their budget spreadsheets.
Thanks for the article, Good luck!
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I commend you on tackling your financial goals and sticking to it. I do have a recommendation. I would place this hierarchy of importance in a comprehensive financial plan:
1) pay off high interest debt
2) create a 6 month emergency fund
3) invest for long-term goals (retirement, college, home purchase)
4) pay off low interest debt
Because long-term investments in the stock market earn about 7% per year on average, if you pay off your 4% loan first, you’re giving up a 3% difference. Conversely, if you’re saving for retirement, but carry a credit card debt at 14%, it’s costing you the 7% difference.
So, if your student loan is low interest, you may want to pay the minimum and use the excess to create an emergency fund or start investing for retirement.
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I wish I knew how much I like the process of budgeting in my early years as well. I could have saved myself a lot of grief. I think this time of year is always a good time to reflect on how things have gone for you, and what you can do in the future. I need to do that myself.
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I use a Net10 cell phone (part of Tracfone wireless). I pay $28 a month, including tax, for 750 minutes. Can’t be beat.
Of course, it’s just a dinky mobile, no internet features or anything. But if all you want is to talk and text, like me, it’s great. I think I bought the phone in a drugstore.
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I also get impatient waiting for interest and dividends. That’s why im a fan of peer to peer lending. I use prosper, and I get tiny amounts of money deposited into my account randomly throughout the month. Its encouraging to learn that you made $.37 today.
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I can pay for the new phone (required to use this carrier) with cash.
This made me consider the idea that you (a general “you”, not Honey specifically) might have otherwise paid for a new cell phone by borrowing money. This seems utterly insane to me. If you have so little cash on hand that you’d need to borrow $99 or whatever for a cell phone, then you can not afford a cell phone (especially since you can literally get them for free. And I don’t even mean “free on contract” but free as in “all my friends have drawers full of one and two year old phones that they’re too lazy to recycle that they’ll gladly give me”).
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I use a mortgage calculator to keep me motivated. This allows me to see how much I are saving in interest by making extra principle payments.
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Short term goals are definitely the way that I stick to long term goals. They help me stay motivated as well, especially when I reward myself when I reach each goal.
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Honey,
I admit, I also geek out over our household’s budget spreadsheets! And, the obsession is 10x worse now that I have over a year’s worth of data for the same tracking categories (now, I can compare YOY income vs. expenses – a whole new source of unbridled spreadsheet geekiness!).
You may be doing this already, but one thing I did to avoid tripping over “reality” when it came to the forecast was to create a dedicated “what if” tab. (I even colored the font a different color so I wouldn’t get mixed up.) In that tab, I can play with sudden drops or increases in income, manipulate our expenses (or even see what would happen if we got rid of one or two entirely), recategorize spend buckets, etc., all without messing up the “actual” planning budget.
That said, some of our debt reduction is VERY slow-going, as you already know, so it is hard to stay motivated. I find myself trying (and failing) to see if there is ONE more thing I can shave & pay something down faster. If we stay the course we’re on, we’ll be pretty much debt free in just under 2 years, but that seems so far away!!!
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I have about 4 years of data, think of all the fun I could have!
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Reading the book “Your Money or Your Life” has been an eye-opener for me – not the usual financial advice (and I’ve read hundreds of such books). I recommend reading it for an entirely new vision of what you are doing with your “life energy”.
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It’s so funny, I budget the hell out of my food for my weight loss (30kg and ongoing), but I still hate to budget my money. I use the same techniques as you do for staying motivated – smaller goals that can be reached within max. 6 months, while keeping the main goal in sight. In fact, dieting and saving money really have so much in common, I often use comparisons when speaking to people about weight loss
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I’ll tellin’ ya,the book “Your Money or Your Life” will put an entirely new spin on both these subjects. I highly recommend it.
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This might be taking it to a whole new level, but to stay motivated in the short term I keep a “win-loss” record each month for myself. A ‘win’ is a day in which I spend equal to or less than what I have budgeted for, and a ‘loss’ is obviously the opposite. Generally, wins include days when I refuse happy hours, ordering out, or exercising the self-control to skip Starbucks even when I really want it. I track personal records for consecutive days, etc. Maybe it goes a little too far but it keeps me in the black!
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I can tell you how to harness impatience when you’re trying to pay off those awful debts just as fast as you can – and I am speaking from experience. Here’s the story. When I was 21 years old I started paying off my undergrad loans (trust me – when I was 17 years old NO ONE gave me so much as a dime for food, housing, clothing – let alone education – so my entire undergrad was paid for by my working and school loans). Then I got married, had a kid and my wife went to a private law school – wow! Did we ever pay for that. Meanwhile, we had another kid and while we were paying off my undergrad and her law school we started saving for our kids’ undergrad education. OK – now I’m 55 years old. My undergrad is paid for, my wife’s law school is paid for, we put both kids thru undergrad debt-free (yeah – 34 years of paying/saving for education). You want to know how we did it? We set an amount – the highest we possibly could and still eat and have fun and we MADE ourselves do it – decade after decade. But we never lost sight of having fun along the way – and when you make a little room for fun along the way then you just get it done – you just do. And while we were doing this, we had vacations every year. We’ve done Disneyland/world a couple of times when the kids were little, vacations every year and we’ve all traveled overseas. Set a budget – stick to it – and don’t focus so much on getting that debt paid off. If you’ve got a budget AND you stick to it – it’ll all get paid for AND you can/will have fun in the meantime – and the “meantime’ is life – so don’t forget to enjoy that too. You’re doing fine. Lighten up on yourself a tad. You guys will be just fine and you won’t regret a minute or a dollar you spent on having fun with your family. p.s. if you’ve got loads in your family that take advantage of your generousity without ever repaying it – lose them – and put that $ into your own family.
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Another vote here for “Your money or your life” – sounds like you’re on track, good work! The hardest is just to keep going and working through periods of low motivation.
I like to do calculations of how much worse off I’d be if I wasn’t agressively paying off my mortgage. It’s really motivating to know I’ll only pay $11,000 interest on my mortgage compared to the $300,000+ if I paid it off the normal way over 30 years.
We’re on track to paying the whole thing off in 3 years. Oh yeah!
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This option may not be available to all, but could work for some. When we were first married my husband and I were overwhelmed by the reality of our combined debts. We did the unthi kablee and asked my folks for help. They agreed to match our debt repayments up to a certain amount each month as long as we did not incur more debt. We finally were able to pay down our debt with this help. Even a small contribution from family is very encouraging and helps pay down debt faster.
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Daily little goals lead up to those BIG goals and it’s a very cool process to say the least.
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I know what you mean. It’s analogous to sending an email and checking every few minutes for a response, or hopping on the scale multiple times a day and hoping for an extra pound off of our weight. We, as human beings, have a need for instant gratification. Not seeing results for a long time can backfire and demotivate us. Setting up short-term and mid-term goals is a good idea. Apart from that, maybe you can focus on some other realms of your life. Maybe it’s your relationships or career or health that needs a push in the right direction. By doing so, you take your mind off finances for a bit and you let the power of time do its job in the background.
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I’ve just recently become conscious about where my money is going. While I don’t have any consumer debt, I do have quite a bit of student loan debt, which will likely take quite some time to tackle. In the short term, my goal is simply to figure out exactly how much I owe and put together a plan to pay it off (even if it will take years). From there, I will definitely set short, medium, and long term goals to keep me motivated. Without goals, it is definitely easy to become sidetracked.
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on the cell phone note. I have airvoice wireless. I use my old t-mobile phone b/c most of them are compatible with the at&t network (basically a GSM network). Since your phone contract will be up you can unlock the phone and then port your number to your new network (pick a provider that bundles from your network for easiest transfer of number and phone). My bill runs about $20 a month now down from $64 with t-mobile. wikipedia has an ok article on mobile virtual network operator (MVNO) so that would be a good place to start. Also the mrmoneymustache forum has a great thread on MVNOs as well.
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