A journey without a plan is doomed to fail, and this applies to your finances as well. Many apps and programs dive straight into analyzing your income, expenses, and saving goals. However, taking a step back to understand who we are can be very beneficial. Getting your goals and intentions set also will help you greatly stay motivated on keeping your finances in order in the long run.
If you open the first tab in the spreadsheet, there is a tab called “Goals & Reflections.” Here, we’ll fill in the main information we need to know about ourselves to help us on our financial journey. As mentioned earlier, the sheer amount of information can make it hard to determine where to start with your finances.
Your Financial Why
Great companies and minds wake up with a purpose, and it’s important to ask yourself the same question: Why are you even bothering to take care of your finances? Maybe you want to start saving more to buy a house, or perhaps you have a nagging feeling that it’s a good idea to get a handle on your finances. All reasons are valid, but writing them down helps. Research shows that defining a “why” significantly influences the behavior you want to create with your finances. Reflection on the why will trickle down once we get started with our expenses, defining how we are getting our income.
My current “why” looks something like this: Making amazing memories and experiencing great things so that when I am on my deathbed, I can smile and tell my children, “Daddy spent his money well.”.
Step 1: Fill in your financial why
Why bother about the why?
A why gives your finances some meaning and purpose. Giving things meaning and purpose will make you more motivated to continue working on it. And it works pretty great. Research shows that people are willing to do very boring tasks in life, as they believe it will bring them closer to their purpose. And let’s face it, managing your finances can be quite boring sometimes, and having a defined why will make us motivated to keep on going.
Your Financial Personality
Besides knowing why you’re doing this, it’s also important to define your financial “who.” Don’t worry, this isn’t about having multiple personality disorders. This building block will be very helpful when we start defining our goals.
Rick et al. (2008) conducted a study on the differences between tightwads and spendthrifts, highlighting the varying attitudes individuals have towards spending money. The research suggests that some people find spending money extremely difficult and uncomfortable—these individuals are termed tightwads. In contrast, others find spending money effortless and even highly enjoyable, classifying them as spendthrifts. Discovering where you lie on this spectrum can be quite enlightening.
Instead of tightwads and spendthrifts I will be using the terminology of FIRE vs YOLO. FIRE stands for Financially Independent Retire Early. This movement, which gained popularity among Silicon Valley tech professionals after the financial crisis, emphasizes extreme saving and investing to achieve early retirement, often in their 30s. These individuals, often called super savers, are highly future-oriented in their financial planning.
Example: Alex, an extreme FIRE adherent
For instance, consider Alex, an extreme FIRE adherent. Alex lives on a strict budget, cutting down on all non-essential expenses, biking to work instead of driving, and living in a tiny home to save on rent or mortgage costs. Alex meticulously tracks every penny and invests aggressively, all with the goal of retiring as early as possible.
Pros of the FIRE approach:
● Early retirement offers immense freedom: Imagine having the freedom to pursue your passions, travel, or simply relax without the constraints of a 9-to-5 job.
● Highly knowledgeable about finances: Individuals like Alex often become very savvy about investments, budgeting, and financial planning.
Cons of the FIRE approach:
● Extreme saving can lead to a frugal lifestyle: Alex might miss out on spontaneous fun and memorable experiences in his youth due to a strict budget.
● Missing out on experiences in early life: Focusing solely on the future can sometimes mean missing out on enjoying the present.
On the other end of the spectrum, we have the “YOLO” (You Only Live Once) or “Carpe Diem” mentality. This approach prioritizes enjoying life in the present, operating under the belief that tomorrow is uncertain. For these individuals, saving is not a priority; they prefer to spend their money on experiences and pleasures today.
Example: Jamie, an extreme YOLO individual
Meet Jamie, an extreme YOLO individual. Jamie frequently travels to exotic locations, dines at expensive restaurants regularly, and purchases luxury items on a whim. Jamie fully embraces spontaneous and lavish spending, valuing immediate gratification over future financial security.
Pros of the YOLO approach:
● Rich experiences in early years: Jamie lives a life full of exciting adventures and memorable moments.
● No regrets if life were to end suddenly: Jamie lives with the satisfaction of having fully enjoyed life.
Cons of the YOLO approach:
● Risk of accumulating debt: Without careful management, Jamie’s spending habits can quickly lead to significant debt.
● Large expenses may only be possible much later: Major financial goals, like buying a house, might be delayed due to the focus on current spending.
I feel that over the years I have become a bit more balanced on my spending and saving behavior. I first was a complete YOLO during my student times, giving all the money on nice experiences, and then went more to the segment of FIRE when I started working. I was saving up quite a bit, but noticed that at times I could become a bit too scrooge. Now I have a feeling that I am in a better balance, living more in line with the seasons when it comes to my savings and spendings.
Step 2: Fill in your Financial Personality
Your Financial Goals
As you can see in the picture, the first two blocks are set. We have learned something about ourselves and can lay the next brick on top of that, our goals. Goals provide direction for how you will save and spend your money, so it’s beneficial to write them down. Trying to keep the balance of living in the moment and being ready for the future, I split up the goals in long term goals (longer than 2 years) and short term goals.
It is good practice to write down both long-term and short-term goals. For long-term goals, I use the SMART criteria (Specific, Measurable, Achievable, Relevant, Time-bound). Specific means that I clearly describe what I want. I make it measurable to give it a certain target amount of money. I make it achievable to make my goals maybe hard to reach, but also not so hard (getting 10 million in 3 years is at the current moment not very achievable). And lastly I make it time-bound by giving myself a certain timeframe and deadline for the goal.
Especially describing the why next to your goals will be a great motivator and also challenger for your goals. Probably a lot of young eager man set their goals to be a millionaire before they turn 30, which can be a great goal, but make it relevant for yourself and yourself only by describing “why” you would like to be a millionaire when you are 30 and maybe you can also be one at age 50?
Here are my three long-term goals:
Step 3: Fill in your Long-Term Goals
You might notice a spending goal instead of a saving goal. Yes! While saving is crucial, I firmly believe that we should also save to spend on things we love to do and have. These long-term goals are not set in stone. It gives a bit of direction but it is definitely good practice to start reviewing your long term goals if they still align with your values and lifestyle. Long term goals are more there to give you a compass and a little bit of direction when it comes to investing. For getting more guidance on what I am saving for, we use our short term goals.
As you can see, I also added a goal for the short term which is not related to either saving and spending, but more of getting more control over my finances.
Step 4: Fill in your Short-Term Goals
That’s it for this blog. We explored our financial “why,” defined our financial personality, and set our long- and short-term goals. With these three bricks laid down, we have a solid foundation and can start building our main pillars—our Pillars of insight.