When Warren Buffett was younger he asked himself, “Do I really want to spend $300,000 for this haircut?”
Why $300,000? Because he knew how powerful compound interest would be with his ability to invest.
It can be argued nothing will have a greater impact on your quality of life than achieving long-term financial goals.
Financial independence, saving for a down payment on your dream home, paying off student loans, becoming debt-free… All these are examples of long-term goals which can enhance the quality of your day-to-day life.
The problem–each of those goals takes years if not decades to complete. While you’re working towards long-term goals, how do you balance your short-term and long-term interests?
In other words, should you get the haircut knowing it will cost you thousands of dollars down the road?
I occasionally come across a story about an individual who didn’t waste a cent for 20 years and was able to retire extremely early. While these stories are inspiring, it’s no achievable for 99% of the population.
Children, student loans, some bad decisions early in life, not wanting to live without air conditioning…everyone has a reason.
For most of us, personal finances are about balancing short-term and long-term interests. This of course isn’t easy in personal finance because of compound interest.
The purpose of this article is to discuss a strategy that has helped me immensely in balancing my own short-term interests and long-term financial goals. A strategy that will help you reach any long-term financial goal easier and faster.
How To Achieve Long-Term Financial Goals
The secret to achieving long-term financial goals isn’t more willpower, more self-discipline, eating rice and beans every day, or going without air conditioning. Fortunately, it’s a lot easier. The secret is to “trick” yourself.
By understanding how your willpower works, you can make achieving any goal much easier.
You see, your willpower is a lot like a muscle–it fatigues with use. Essentially, you can’t count on willpower to last forever.
Just like a muscle, once your willpower goes beyond its current capacity it needs to rest. Only once it rests, does it grow.
Therefore, your goal is to use the limited willpower you have to set up a system. A system that operates behind the scenes and essentially hides your hard-earned money from yourself.
For example, say your goal is to save $1,000,000 in a retirement fund. You plan on achieving this goal through your 401(K) and an IRA.
In a 401(K), the money is automatically withdrawn from your paycheck into your account. You don’t initiate the transfer every pay period, it’s completed automatically. This makes hiding the money from yourself, fairly easy.
An IRA, on the other hand, needs to be withdrawn from your personal account. The money goes into your personal checking account, and then after you initiate the transfer, it’s deposited into your IRA.
Fortunately, you can automate this deduction into your IRA by linking your investment account with your direct deposit account.
Say you’re paid on the 1st and 15th of the month for a combined monthly income after taxes and 401(K) deduction of $3,000. In this scenario, you can initiate a deduction of 10% or $300 on the second of the month.
The benefit here is what’s leftover is yours to spend. In the example above, you’d have $2,700 of monthly living expenses you can spend guilt-free as you’ve already put money towards your long-term goals.
Achieving Long-Term Goals Faster
Hiding the money from yourself makes it much easier to achieve your goals. While this method works, it does take time. So, how can you get results faster?
Here’s the trick…
Whenever you get a raise, bonus, gift…use your limited amount of willpower and put a certain percentage away immediately.
For example, say you’ve gotten a 4% raise. In this scenario, you could increase your 401(K) contribution by 2%.
If you’ve got a bonus or a gift, but immediately a percentage away towards your goals. Then, you can spend the rest guilt-free.
My second trick for achieving these goals faster is to once a month, I’ll make a list of “20 Ways I Can Achieve My Goal Easier or Faster”. Another good question I ask is, “What are 20 things I can do today, I’ll be thankful for in 10 years?”
It’s not hard coming up with a list of some ideas. Selling an item on eBay, picking up an extra project at work…I just write what comes to mind. I then implement one or two using my limited willpower.
Achieving any worthwhile goal is hard. If it wasn’t hard, everyone would be able to accomplish it.
The key is to understand how willpower works. By doing so, you can make achieving any goal, not just financial, easier and faster.