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To reach your goals, it’s time to think (really, really) big!

It’s mid-January—that time of year when, at least for most of us, New Year’s resolutions begin to fall by the wayside. The surge of gym-goers and dieters has faded, and we’re back to the same old routine. My question today is this: are you taking steps to get a clearer picture of your financial life? If not, then now is a perfect time to begin changing how you think about your money.

Two years ago, in January 2017, I introduced Jonathan Clements’s book How to Think About Money. Since then, I’ve shared three of the five steps in his approach to what has been called “financial feng shui.” Step Number One: Buy More Happiness. Step Number Two: Bet on a Long Life. Step Number Three: Rewire Your Brain. At long last, it’s time for Step Number Four: Think (Really, Really) Big. As we kick off a new year, there couldn’t be a better time to be sure you’re not only thinking big, but thinking big in ways that can help you build a stronger, more confident financial life that lasts not just the next 12 months, but a lifetime.

Clements suggests (and I have witnessed this time and time again, so I wholeheartedly agree!) that the reason most people struggle to think big about their finances is that we’re programmed to view our financial lives as a series of disconnected pieces. Insurance. Property. Debt. Investments. Cash. Because we rarely talk about how all of these pieces fit together, we end up making decisions that make no financial sense at all. We over-insure our cars but under-insure our lives. We carry credit card debt (an average of more than $8,000, according to a recent study by WalletHub) while “saving” money in low-interest savings accounts. We struggle to save for retirement but don’t hesitate to claim Social Security as early as possible—sacrificing a guaranteed opportunity to nearly double the monthly benefit in retirement. (Read more in my post, Social Security and Women: Tackling the Challenges.) We buy lottery tickets with the hope of getting rich quick but balk at investing in a “risky” stock market (which has returned a compound annual rate of return of 11% since 1980, despite multiple downturns and the 2008 financial crisis).

Of course, “we” doesn’t mean “you” or “I.” Or does it? Chances are that at least one or two of these examples resonates with you. If it does, it’s time to start thinking really, really big about your money.

Where should you start? With your paycheck. Your lifetime earnings is the primary source of every dollar you spend, save, or invest from your first job through your first day of retirement. According to Clements, over a 40-year career, our “human capital” is the source of more than $2 million (in today’s dollars). That’s a big number! And the younger you are today, the higher that number will be. To think big, begin by considering and carefully planning what you want to do with those millions. It can suddenly feel a whole lot like winning the lottery after all!

While Clements offers lots of excellent guidance (I highly recommend reading his book cover to cover), here are the most important takeaways from his Step Number Four:

  1. Consider the tradeoffs.
    Even when retirement is in the distant future, funding retirement should be everyone’s first goal. It’s daunting, it’s far off, and it’s not fun. Plus, it absolutely must be done using current income. But during our working years, other immediate goals often take priority. Buying a home. Educating your kids. Keeping up with the Joneses (and the Jones’s kids). Suddenly that 50th birthday rolls around, you’re nowhere near your goals, and time is no longer on your side.

    To gain perspective, start by taking a look at your net worth. (Check out this net worth primer from Yahoo! Finance.) Add up your assets, subtract your liabilities, and you have your total net worth. Next, look at your short- and long-term goals to determine how much of your $2 million paycheck should go to each one. In most cases, retirement and housing will top the list. (Notice that retirement is #1, always!)

  2. Remember that all debt is debt!
    Almost every day someone asks me this: “If I can get 0% interest, isn’t it smart to buy the [fill in the blank]? It’s free money!” No. It isn’t. No. No. No. To stress the point, all I need to do is refer to net worth. A 0% loan may feel free, but that debt spent on consumption reduces your net worth. If the purchase is part of your long-term plan, it may be fine to take on new debt and “smooth consumption” by spreading out payments over time. If it doesn’t fit into your plan, it’s simply debt, and it is anything but free. Keep debt service within reasonable boundaries. Banks use 36% when qualifying borrowers for mortgages, and Clements recommends student loan payments shouldn’t exceed 10% of your expected income after graduation.

  3. Manage spending.
    At every age, one of the biggest financial levers at your disposal is the ability to vary your spending. If you’re retired and concerned about the recent market downturn, rather than toying with your investment strategy, look at how you can reduce your spending. Avoiding debt and living within your means allows for more discretionary spending. Keep your eyes on your biggest goals, and manage your spending to support the things that matter.

  4. Permit yourself to rethink retirement.
    It may be the case that funding all of your goals requires increasing your lifetime paycheck by working longer than planned. Working past the 65-year mark is more common today than ever, and that’s not necessarily a bad thing. The “greatest generation” may have retired with pensions at 65, but they also expected to live for only another 5 or 10 years. I imagine spending my next 20 or 30 years being as relevant and engaged as I am today. Read more on how rethinking retirement can work for you in my post, Is “retirement” the only answer? Take time to rethink the possibilities.

The New Year isn’t the only reason to focus on thinking big. Today’s stock market has newscasters and financial pundits making lots of noise about how to avoid losses and make the best moves in the face of an economic downturn. Remember that the market is cyclical. There will be ups and, yes, there will be downs. By planning based on your paycheck and goals, market volatility will not affect your financial big picture. Commit to thinking (really, really) big and start building a fantastic financial future today.