For a month, you scrimp and save. You deny yourself a lot of little treats. You sell a few things on eBay. You make some meals in advance and eat at home a lot more. You make careful grocery lists.
At the end of the month, you sit down and reassess your financial situation… and you’re still in debt. You still owe a big sum on your credit card and on your student loans. You haven’t paid off anything. You’re still facing a bunch of big bills in the mail.
The result of all of that work for that month seems to be nothing, so frugality must not work.
How about this story instead? You’re forty years old. You’ve been saving for retirement for a while and have $100,000 saved up, but you’ve now decided to take an active hand in things. You do your homework when it comes to retirement savings and you decide to put all of your money, for now, into a total stock market index.
At the end of the year, you look at your balance. It’s been a rough year for stocks, so your investment is down 20% and you’re looking at only $80,000 in savings. $20,000 disappeared.
The result of that investment choice seems to be a big loss, so investing in stocks must not work.
The same problem actually runs through both of these stories. When you focus entirely on short term results for a long term solution, you’re going to draw some pretty poor conclusions.
Most personal finance tactics are all about the long term. Cutting back on your spending and applying that money to debt is going to take years before the debt falls away. An investment in the stock market is going to take at least a decade before things settle down to a reasonable long-term average return.
That’s why if you’re evaluating things in the short term, such as after a month or a year, you need to focus on the process and not the results.
You’re being frugal to pay down debt? At the end of the month, you shouldn’t worry that your debts haven’t disappeared. Instead, you should look at how your total debt has actually gone down this month. Figure out your total debt balance at the start of a month, then again at the end of the month. Subtract the finishing number from the starting one. What you’re seeing is proof positive that the process works and that you should stick with it.
You’re investing for retirement? At the end of the year, look at the amount you contributed this year and also look at the long-term returns of your investment. That’s your proof that the process works, not your balance at the moment.
With personal finance, the process is king. It matters far more that you’re spending less than you earn each month than whether your debt has disappeared today. As long as you spend less than you earn each month and you put that difference toward your debt, your debt will go down and it will eventually disappear. The process of spending less than you earn each month is what matters.
Similarly, if you put away money each paycheck for retirement (and have invested in something reasonable), your retirement balance will grow over the long haul and it will help you in your later years. Yes, the balance might go down sometimes, even over the length of a year, but if you stick with the process, it will go up over time.
Whenever you make good moves over and over again, those good moves are going to add up to good results, period. If you obsess only with results, especially in the short term before you’ve given those good moves a chance to build up, you’re going to draw some bad conclusions.
This is also why sustainable change is so important. Since it takes a while to start seeing the results spreading throughout your life, you need to make changes that you can stick with while the positive changes are building. If you’re making a money-saving change and you find it to be very difficult to stick with, step back and find something more sustainable.
If you’re trying to improve your financial state, don’t get upset if you don’t see transformative change after a month or two. Don’t focus on the results. Focus on the process – a process that leads inevitably to the results you want. Don’t worry about your mountain of debt; worry instead that you spent less than you earned this month and did something positive with the remainder. Don’t worry about the volatility in your retirement; worry instead about making contributions and sticking to a long-term plan.
Stick with the process and the results will come naturally if you give the process plenty of time to work.