Small is huge these days. From tiny houses to minimalist wardrobes, micro is having a moment. The trend has crept into many aspects of Americans' lives, but there's one area where there's still room for improvement. Americans continue to place a lot of pressure on themselves to meet big financial goals. The burden doesn't have to be so heavy. You can apply the micro mindset to financial goal setting.
There are some financial basics many people know they ought to be doing. They understand they should be spending less and saving more, and they know they need a retirement fund. In these cases, dwelling on the larger picture can actually be detrimental. For instance, young people are bombarded with big numbers about student debt and how far behind they and their peers are when it comes to saving for retirement. Hearing messages like this can be very discouraging. Those story lines tend to focus on the big, final number. People see that, become overwhelmed and opt not to act. And so the problem remains. It's time to use a smarter tactic.
Remember that larger goals are made up of smaller milestones. No one writes a novel in one sitting. The key to successful goal setting is to refocus and concentrate on the chapters (or paragraphs or sentences) of a larger financial story. Here's how this mindset applies to some different areas of money management.
Credit card debt. Considering that the average credit card debt for balance-carrying households is $16,048, it's easy to see how tackling the debt can be intimidating. There are a couple of microapproaches to explore:
- Pay the minimum balance on all cards and then concentrate on paying the lowest balance off first. This start-small method brings some quick wins, which helps people feel like they're making progress. Once they pay off the lowest-balance card, they can apply that payment to the next-lowest card and so on. What starts as a very small goal snowballs into a much larger one.
Retirement. It's no secret that most people need to save quite a nest egg to support themselves in retirement. There are free planning tools available that can help you build an investment strategy geared toward your monetary goals, but don't stop there. You also need to think about more immediate goals, like what you need to save each month. Especially if retirement is several decades away, regular retirement contributions have the potential to really add up thanks to the power of investing over time.
Consider this: If a person starts saving $100/month at age 21 and stops at age 41, they'll have more than $150,000 by the time they're 67. (Assuming a 5 percent yearly return compounded monthly.) That's the kind of microgoal that has some huge potential.
Paying off a mortgage. For many people, their mortgage is their biggest debt. It almost seems too big and omnipresent to try to tackle. They believe it's just the cost of living in a home. But this isn't rent. Paying off a house can have a big financial impact, and it's definitely possible to do it sooner than the 30 years projected at the outset of the loan.
Paying just a little bit more each month can save years on the life of the loan and thousands of dollars. For example, if someone has a $200,000 mortgage with 4.5 percent interest, adding an extra $100 to the principal will shave five years off the loan and save the homeowner $32,000 in interest. Those are some significant savings.
These are just a few examples of how mini goals can make a big difference. The bottom line is that paying attention to the small stuff can help tackle the big stuff. Cutting cable can help a recent grad pay down student debt faster. Saving a few dollars a day by bringing lunch to work can add up to a European vacation. The list goes on. So think less about buckets of savings, debt, etc. and think more about the teaspoons.
TD Ameritrade, Inc., member FINRA/SIPC. Stock investing is subject to risks, including risk of loss. Commentary provided for educational purposes only. Past performance of a security, strategy or index is no guarantee of future results or investment success. Past performance does not guarantee future results.