Lengthening Your Financial Horizon

In many ways, I was lucky with respect to my financial education.  My parents were planners and savers and were embedded with a very long-term financial horizon that has enabled them to own their home and pay off the mortgage 8 years early, help 2 kids through college and be comfortable in retirement. When I was in college, I had a roommate Maggie who environment was in many ways the opposite.  Maggie’s parents were both highly educated professionals with very high paying jobs. In fact, their income was some multiple of my parents.  But, the family liked to spend, and was practically living paycheck to paycheck.  Maggie spent impulsively, going out for meals (despite being on the dormitory meal plan), purchasing music, clothes, and lots of other things.  She received a generous allowance weekly from her parents, but was always having to borrow a few dollars to join in various activities by the end of the week (which she always repaid).  When I see the struggles many of my friends have with saving, investing, and long-term planning, I realize that many were exposed to an environment like Maggie’s and that they haven’t really attempted to make long-term financial goals.  Here some thoughts to get started:

–Articulate your long-term goals with specificity — such as to payoff my mortgage before I reach age 45, or to have a sizable college fund once the kids are college age.  This specificity will help to keep you anchored and focused rather than nebulous goals like save and invest more.

–Chart intermediate milestones to know if you are on track -- be sure to have points, possibly each quarter, definitely at least annually, to check in to make sure your plan is on track.  Re-evaluate your goals annually to ensure they still make sense in the overall life picture.

--Start small and celebrate early accomplishments – Many people like Maggie would set out goals that were too ambitious (like I’ll save enough money to go to Paris for the summer) rather than immediately achievable (like I’ll put aside 25% of my allowance this week) and did not build confidence that she could adhere to a regular plan.

–Keep in mind that consistency is the key — sure, there were weeks or months when my parents would overspend, but they would be on track by readjusting their spending the following month.  This consistency is the key to longer-term financial goals.  Be reasonably forgiving of yourself.

–Try to avoid comparing yourself with others — many people get caught up in buying stuff which competes with funds for saving and investing.  Reducing the incentives to buy a lot of stuff is often the necessary parallel to longer-term financial planning.

--Learn from others that are successful – a number of books these days are focused on this long-term horizon, and some communities and bulletin boards as well (such as bogleheads.com) Take a look at these to see how other people are managing their own investment goals.

shared at this week’s Carnival of Personal Finance