Numbers can be powerful. And they can be fun. One thing I like to do is work backwards from an end goal. There are several benefits of doing this, one of which is to break things down into bite size bits so you can better understand how you can achieve your goals. It’s like looking at your destination on a map and tracing the route to back to your doorstep. Sometimes starting at the end is just easier.
How much does your debt cost you each day?
Let’s look at a powerful example of how working backwards can change your point of view about how you borrow and spend money. Gather all your debts, including your auto loans, student loans, mortgages, HELOC, credit card statements, etc. We are going to examine how much interest you pay each month on all of your loans. Take these statements, add up how much you pay each month, then subtract your principle from how much you paid the lender and you will see how much interest you are paying each month. Click through to see an example of this exercise. The results will surprise you.
This eye opening exercise shows you how detrimental debt is to your financial goals. If you want to take the example further, divide your monthly amount by 30 and you get a number for how much your debt costs you each day. Try it. It will further open your eyes to how expensive debt really is.
How much do you need to earn each day?
But it works the other way as well. You can break down these numbers for earning instead of spending. This is a more positive way to look at things because you are focusing on earning money, not spending money.
To determine how much you need to earn each day, start with your budget or total monthly expenses and divide by 30. You have a rough answer of how much you need to earn just to break even. Be sure to take into account irregular expenses or you are shorting yourself.
Reaching your financial goals, one day at a time
Now let’s take it a step further and apply this concept. Take a look at your financial goals. How can you reach them? Let’s look at a common example, such as maximizing an IRA. If you are under age 50, your max contribution is $5,000. To max out your IRA, all you need to do is save $416.66 per month, or roughly $13.70 each day. When put into bite size bits, $13.70 doesn’t seem like a lot of money (and it’s certainly less than most of us are paying on interest payments every day!).
You can apply this concept to any financial goal, including maxing out your 401k, saving for a house, a new car, a vacation, etc.
Why break down by day?
Breaking things down to a daily goal makes it easier to make incremental changes. For example, let’s say you need to earn an extra $1,000 per month. Well, that is a lofty goal for most people. I can’t arbitrarily decide I want to earn another $1,000 next month and implement it overnight. But I can say I want to earn another $33 a day and find out a way to do that. Want another $100 a month? Just earn (or save) $3.33 a day and you are golden. Want another $10,000 a month, hey, just earn another $333.33 a day and you are in the money. Want another $100,000 a month? Yeah me too.
It’s all about economies of scale
The point here is to break down your goals into achievable milestones. It’s hard to come up with $100 or $1,000 overnight. But $3 here or $33 there is more attainable. Find a process and learn how to replicate it. Once you do, you can get to the point where you are not only reaching your goals, but setting more aggressive goals and finding a way to reach those.
Photo credit: chrisinplymouth