12 Key Principles of Goal-Oriented Personal Finance

Different people approach personal finance in different ways.

Some people simply like to follow “rules,” like “put 10% of your money toward retirement” or “spend less than you earn.” They do this out of an understanding that if they follow this rule, they will be in good financial shape in the future.

Other people hire financial advisors to help them plot out their future plans. They nod yes to the plan that the advisor comes up with and then trust that the plan will take care of them in the future.

Still others are fascinated by the minutiae and consider it a win when they save a little bit of money here or there. In general, people in this group are extremely careful about spending money needlessly and thus follow their feelings about keeping spending in check and not getting into financial trouble.

For me, it’s very different. I’m a goal-oriented person, and I approach personal finance from a goal-oriented perspective.

“Goal oriented” personal finance means putting large goals that need lots of financial support central in life, aligning professional and financial and, to an extent, personal moves around those big goals.

Stephen Covey once wrote about a great analogy for this, his “sand and rocks” analogy.

In this perspective, think of your life as a jar. In that jar, you can really only fit so many things, and those are the things that you spend your money, time, energy, and focus on. Rocks represent the big, important things in your life – the central things that you value and want to achieve. Sand represents all of the little things in life – little things that might be enjoyable but don’t really matter in the big picture.

If you fill your jar up with sand – lots of little pleasures, in other words – you don’t have room left for the rocks. You’ve used up all of the time, money, and energy you have in your life.

The approach I prefer is to put the rocks in first. Those rocks are your big, central goals in life, the things you really want to achieve. For me, the big rocks are learning and self improvement, strong relationships with my family, and retiring early. Once those are securely in the jar, then I add the sand – all of the little things in life.

For me, fulfilling those core goals is at the very core of my life. I want those things more than anything else and I’m willing to work every day to make sure I have them. Taking steps toward those goals takes priority over everything else.

When you adopt that perspective, some principles come to the forefront. Here are twelve principles for life that work really well with that kind of “goal-oriented” financial, professional, and personal life.

Principle #1 – Take Transferable Steps

First of all, what’s a transferable step? In my eyes, a transferable step is one that benefits multiple core goals at the same time, including both present and future goals. If I can find a way to make a time use choice or a money use choice that’s beneficial to more than one of my goals – or is very likely beneficial to a future goal – then I should put priority on that action.

For example, investing in things that have liquidity is a way to further my family-oriented goal (as we’re saving for a different house with an additional bedroom and a drastically different kitchen to meet family needs) as well as my early retirement goal and, potentially, a lot of future goals.

Another example: learning something that I can directly apply professionally not only scratches my learning and self improvement itch, it also helps my goal of retiring early because it boosts my potential earnings.

There are a lot of transferable skills that a person can learn as well that will help out with most life goals. Things like time management, information management, money management, self-control, and communication skills are going to help out with many of your goals in life, regardless of what they might be, so it can be useful for many goals to learn about and practice these kinds of transferable skills.

I really love transferable steps. They allow me to really give my heart and soul to focusing on the moment because I know that being successful in those steps is going to help out multiple life goals at the same time.

Principle #2 – Pay Yourself First

“Pay yourself first” simply means that when your paycheck comes in, the absolute first thing you do with it is put money aside for future goals before spending it on today’s bills and pleasurable spending.

In other words, you treat your paycheck exactly like the jar from the analogy at the start of this article. Your paycheck is the jar, and putting things in the jar takes up some of the money your paycheck provides. All you’re doing here is putting the rocks – your big goals – in the jar first and then fitting the sand – your bills and your “fun” spending – around it.

That’s actually not how most people run their finances. Many people start dumping in sand immediately and, before they know it, their jar is full and they haven’t got any room left for the rocks. In other words, they spend all of their income on today’s bills and on fun things, leaving no room for putting money aside for their big goals.

The trick is to pay yourself first, then figure out how to make ends meet with the money that’s left over.

I find that automating this makes it much easier to stick with a “pay yourself first” plan. You can automate things like 401(k) deposits at work very easily, but you can also set up investment accounts to automatically withdraw money from your checking account on a weekly or monthly basis. You can also set up a system whereby your check goes into a separate checking account and then a portion of that check is then automatically transferred to your main checking account, leaving part of it behind for other purposes.

Principle #3 – Adjust Savings Upwards, Not Downwards

One mistake that many people make when it comes to saving for a goal is that they start off by saving far too much. They agree to contribute a large percentage of their income, then they suddenly find that their day-to-day life is much more difficult than they expected.

This leaves behind a bad taste. “Saving is hard,” they think, and then they drop their savings level significantly and never ratchet it back up again. They then find that their goal is hard to reach because of the lower savings level and the whole endeavor begins to feel impossible.

I’ve found that a much better approach is to start off slowly with the savings and then ratchet it up over time. A small amount of savings at the start is something that’s very manageable and then choosing to bump it up a little feels like an exciting positive step forward, but it’s still one that represents just a little life change.

Another advantage of the “adjust savings upward slowly” strategy is that it can go hand-in-hand with increases in income. For example, if you get a 3% increase in pay, just simply ratchet up your retirement savings by adding to your contribution so that much of the raise simply goes away. Not only do you get the benefit (and happiness) from increasing your savings, it won’t have any negative effect on your day to day life.

Biting off more than you can chew is a sure way to make you feel negative about a big long-term goal. (This can actually be a good choice sometimes for shorter-term goals and projects.) Eventually, the tradeoff won’t seem worth it and you’ll abandon or back down from the goal. A much better approach is to start small, see that it’s not that bad, and then ratchet it upwards slowly, particularly in parallel with positive changes in your career and life.

Principle #4 – Articulate Goals Clearly

Goals are obviously at the center of “goal-oriented personal finance.” It’s all about identifying big things that you want to achieve in life and then doing what it takes to get there.

Part of that challenge, of course, is to have a sense of exactly where you’re going. It’s easy to talk about vague life ambitions – “I want to have a family” “I want to be successful” – but those often don’t really mean anything. How do you have a functional plan to “be successful”?

The truth is, you can’t.

A good goal needs a bit more detail than that. It needs enough structure that you can come up with actual tangible steps to take that will help you achieve that goal. Otherwise, it’s just a daydream.

So, what is it that you want to achieve? What do you want to have in five or 10 or 20 or 30 years? Sketch out that life and look for the specific things that really matter to you. What are they? Describe them in reasonable detail, but focus on the things that you can personally control rather than the things that you cannot.

For example, I can’t control the life choices that my children make, but I can control how I interact with them and how I behave toward them. I can’t control exactly where my career will go, but I can control how I build myself up to be able to navigate those twists and turns.

It’s in the things that you can control that you’ll find clear goals for yourself, financial and otherwise.

What about the fact that you’re going to change over time, and that your goals will change? Yes, that will happen, and that’s the reason I started off this article by talking about transferable steps. The more transferable your steps are toward your goal, the easier it will be to step into new goals as you change over time.

Principle #5 – Avoid Making Life “Un-Fun”

Many people tend to turn working toward goals into a black-and-white thing. Either you’re having a “fun” life where you don’t really worry about such things or you have a “miserable” life without any fun where you’re obsessed with goals.

The truth is that neither one of those outcomes is any good.

If you’re focused on the short term “fun” all the time, you’re not going to build up anything in life. You won’t have great opportunities in the future. You won’t have savings to support yourself for the big endeavors you might want to take on later in life.

On the other hand, if you’re focused on the long term all the time, you’re going to miss out on a lot of joy today. I’d miss out on the chance to watch my children grow up and to be a part of their lives, for starters.

Neither of these scenarios are good ones.

The best solution, I’ve found, is somewhere in the middle, where I enjoy many things today (but not every single hedonistic option) while also taking lots of steps toward tomorrow’s goals.

This is why I’m constantly on the lookout for personally fulfilling things with a low financial cost. In my eyes, those things are incredibly valuable things to have around to succeed at goal oriented personal finance. For example, I’ve found that I really enjoy doing things together with my whole family at home. I don’t feel the need to go somewhere or do something expensive to have that joy. We go to the movies perhaps once a year, for example; instead, we have a “family movie night” at home once a week where we all jumble together in the family room and watch a movie together with a big bowl of popcorn and the lights off. That has virtually all of the fun of going to a theatre for a movie with about 2% of the cost.

Fun shouldn’t be eliminated from life as you tackle goals. At the same time, fun doesn’t have to involve sacrificing your financial goals, either. You just need to look for ways to enjoy yourself that don’t involve throwing money around by the fistful.

Principle #6 – Take Pride in the Journey

One challenge many people face with big goals is that they only really feel success if they achieve their goal. Everything becomes about the goal they’ve set for themselves and whether they achieve that final number or not; if they’re not there yet, then they’re a failure.

That’s a horrible approach to take toward a goal. My approach is much different: as long as you’re heading toward your goal in a reasonable way, you’re successful and can take pride in that goal.

For example, one of my main goals is to save enough money for early retirement. For me, the success or failure of that goal does not hinge on me retiring at some early age. That’s the long term desired outcome, but that’s not what makes it successful.

For me, the success of that goal hinges on whether my net worth is going up each month. Is my net worth higher than the month before (after factoring out changes in the stock market)? If the answer is “yes,” then I’m successful at my goal. If the answer is “no,” then I have some work to do.

You can take this approach with almost any self-improvement task. For example, your weight loss goal isn’t a failure if you don’t make it to your magic weight number right away. A much better approach is to keep track of your running weight average – is that declining over time? Weigh yourself every week and then don’t even really worry about the number until you’ve got 10 numbers written down, then average those numbers. The next week, average only the 10 most recent numbers – is that average lower than the average from last week? If it is, then you’re successful. (In essence, you’re competing with your weight from two and a half months ago.)

Principle #7 – Let the Goals of Other People Remain Their Own, Not Yours

Different people have different goals in life and different values that drive them forward. Some people have goals that center around career success – or the appearance of it. Others might have a goal that involves having a giant beautiful home, or perhaps to drive a gorgeous car.

Those are fine goals. They might even have some real appeal to you. However, they aren’t necessarily your goals.

They’re someone else’s goals. Someone else chose to prioritize having the big house or the appearance of career success or the shiny car. Not you. That means you have no reason to be working toward those things and you have no reason to be spending your money or time on those things.

That doesn’t mean you can’t appreciate a nice house or a shiny car. I drive a thirteen year old SUV that I bought off of Craigslist (seriously) because a shiny new car isn’t in line with my personal goals, but that doesn’t mean I don’t appreciate looking at the beautiful lines of that orange convertible that this one guy down the block owns.

It’s pretty, and it would be fun to drive it, but I’m not willing to trade my progress on the goals that matter to me for that shiny car. It’s not a tradeoff I would be happy with at the end of the day.

Let the goals of other people be their own, though it’s fine to appreciate them. Let your goals be your own. They don’t have to be the same thing or have any overlap whatsoever.

Principle #8 – Keep Close Track of Your Progress

As noble as our big goals might be, it’s easy for us to get distracted from them. Our minds are wired to think for the short term. We look ahead to the next meal, the next day, the next weekend. We have to really focus to look ahead to the next decade.

One of my favorite solutions to this conundrum is to keep careful track of my progress toward goals. Rather than always looking far off at my destination, I turn my eyes instead to where I stand right now, particularly in comparison to where I stood in the recent past (a month ago or a year ago).

For financial goals, I look at the numbers. I look at my net worth and compare that to where I was three months ago or a year ago. I look at the balance of my “early retirement” fund and compare that to where I was three months ago or a year ago.

The “success” of my goal hinges entirely on positive progress in those comparisons, not in whether or not I’ve hit that giant destination. As long as I keep chugging along and making positive progress on those short term comparisons, I’m going to eventually reach that big goal.

Thus, keeping close tabs and measurements on my progress is key for me as I work toward my big goals.

Principle #9 – If a Goal Is Too Big, Make Milestones

Another great approach for solving the problem of big goals feeling too far off on the horizon is to set shorter-term milestones that lead to the big goal.

For example, let’s say that my magic number for retiring early was to have $1,000,000 saved up. With that number, I could live off of $40,000 a year and the money would last for about thirty years – and before I ever reached that number, I could start propping it up with Social Security money and make it last a very long time.

Rather than worrying about that huge number, I could instead focus on milestones along the way. For example, I might set up a milestone of reaching $200,000 by the end of this year, and $300,000 two years from now.

A shorter term goal like that can really light a fire under you. It gives you something within reach that you can work toward. Rather than focusing on a huge number that feels impossible, you have a target that really challenges you right now but you can actually see it and almost reach it. You’re not worried about saving another $800,000. You’re worried about saving another $9,000 by the end of this year.

Another great feature of this method is that you can feel the success of achieving a big goal on a more regular basis. Yes, reaching your ultimate goal will feel amazing, but reaching that milestone along the way feels pretty awesome, too.

Take your goal and break it down into smaller pieces, then focus on that small piece. If the small piece is still too big, break that one down, too. Take it one piece at a time and you’ll get there.

Principle #10 – Reconsider Your Goals Regularly

As you grow as a person over time, you’re going to find that some of the things you once wanted are going to fade in importance and other things will grow in importance to you.

Five years ago, I was very focused on buying a home in the country. It was something I deeply wanted. At this point, it’s still on my radar, but it is a very secondary goal in my life.

If I stuck with that “buying a country home” goal as a primary goal, I would be feeling very unmotivated toward that goal. It would be easy for me to get distracted from it and I would be much more likely to make financial mistakes along the way.

Instead, I regularly re-evaluate my goals and ask myself how important my goals really are to me. Over time, there are big shifts, and that’s okay. What matters is that I am in touch with the things I want from life and that I feel excited working toward them.

The fact that goals shift like this over time points back to the importance of transferable steps as discussed in the first principle in this article. Transferable steps mean that even if my goal changes, my progress toward that goal wasn’t a waste. If I focused on transferable steps, not only will they work for the goal I’m moving toward now, it’ll also likely work for my goals as they change in the future.

Principle #11 – Always Question Distracting Desires

The temptations of everyday life are real. I’m constantly tempted to spend my money on my hobbies or on entertainment expenses or on upgrading things around the house. And, yes, sometimes I do spend money in those ways.

The thing is, I recognize that such expenses are largely a distraction from my big goals. They almost always represent progress away from those goals I hold dear and when I step back and think about that, I don’t like it.

It’s a constant push and pull, really. In the moment, I’m pulled toward those immediate pleasures and temptations. When I step back and look at the big picture, I’m pulled back toward my big goals and feel regret that I was tempted in the moment.

My solution to that conflict is to strongly question all of my short term desires. I put them under the interrogation lamp all the time. Why do I want this item? Is it really a good use of my money? Am I going to get adequate life value out of this item for the time and money I put into it?

I often run through recent purchases and potential purchases in my mind when I’m taking a shower or going for a drive or doing something else that doesn’t require total focus. I question all of the non-essential ways in which I spend money and decide whether or not those choices are really good ones.

Sometimes, purchases do come out the other side looking pretty good. At other times… not so much. I find that an awful lot of my temptations look pretty foolish when I give them a serious look.

Principle #12 – Find Social Support

I believe strongly in what Jim Rohn said about how people are the average of the five people they spend the most time with. I find that when I spend a lot of time with someone, I tend to adopt at least some of their ideas and perspectives on life in general.

That’s why it makes a lot of sense for me to spend as much time as I can with people who share my financial philosophies. A few years ago, I had a dinner party for my closest friends in the world. All of us around the table were in our mid thirties. All of us had paid off all of our student loans. All of us had purchased homes and paid off our mortgages in full. None of us had credit card debt. None of us had car loans. None of us earned a six figure salary, either.

How is that possible? We all shared the same financial philosophies, more or less. Rather than going out on the town, we were enjoying a potluck dinner at my house. Rather than buying expensive bottles of wine to share at the table, we mostly drank water and shared small glasses of a really inexpensive wine that was perfectly tasty. None of us were dressed in expensive clothes, either.

We spend our money on the things that are truly most important to us. We try our best not to get distracted by the tempting things of the moment. We make choices with every paycheck to build toward our long term goals.

We support each other in our positive choices, and it makes all the difference.

Final Thoughts

Goals are at the center of my life – financially, professionally, and personally. To me, a fulfilling day isn’t just about pleasure in the moment, it’s about making real progress toward the life that I want to have.

These principles make that possible. They provide constant guidance toward a life that provides a great deal of joy, both today and tomorrow. I hope that these principles prove useful to you in your journey, too.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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