Since my financial rant the other day, I've been thinking a lot about what it takes to be successful at personal finance. Success means different things to different people, so let me first defines what it means to me: it doesn't mean being a multimillionaire, success means that you are actively working on improving your financial situation. It doesn't matter if you have made mistakes, or are in debt, or barely have two pennies to rub together, as long as you are actively working towards making your financial life better, you are a success in my book.
It seems to me that people who are able to make significant impact on their finances have a common skill - the ability to see not only the forest and the trees, but also the acorns. These are people that understand the importance of making short, medium and long term goals. They see how relatively small changes can effect the big picture. Whether it is debt snowflakes, debt snowballs, or debt avalanches* they can picture how these things can all work together.
Let me give you an example from my workplace...
Recently I wrote about how my company went through layoffs. After the dust had settled, we decided to rearrange our office. Our building is "L" shaped. Prior to the layoffs we were pretty well scattered throughout that L, but after the layoffs, we managers decided it would be best for productivity and morale if we consolidated and all moved together into the short arm of the L, leaving the rest of the office fairly empty. The in the long arm of the L would only be left two occupied offices - one for my boss and one for the accountant (both of whom work part time.) So, everyone moved... but me. The accountant wanted to close the books on 2008 and get out the W2s before he and I switched places, so for a week and half I was the lone person on the long side. While I was over there, I took to shutting off the lights on my side - just leaving a few emergency lights on. My office was lit and the area outside of it was plenty bright enough - I didn't need all those florescent on just for me. Now, some people might comment that turning out a few lights was not going to make a significant impact, but I've been being frugal for so long that I couldn't help it! Then talking to a member of our tech staff one day about it, he calculated that when all the lights were on we were using 4000 watts... per hour! I don't know how much I saved by keeping the lights turned out, but I have noticed that since I switched offices, my boss and the accountant keep the lights off too.
The point of this is that when you are looking at your financial picture you have to see how small actions can make an impact. Conversely, it is just as important to be able to set a big goal and be able to see the various steps it will take to get there. It is important to take those small financial steps and grow them into mid range goals and then on towards a bigger and happier financial future - whatever that may mean to you. If you concentrate only on the big goals, but never are able to put together the smaller steps that can get you there, you may end up with nothing more than pipe dreams. If you concentrate on the small goals, but without an overall picture, you are doing the equivalent of running in place - a lot of effort for not going anywhere.
Again, success can have a dozen different meanings, for some it may be getting filthy rich - for others it may mean paying off credit card debt. The point is, that to make it work, you can't have blinders on - you have to see the big picture, its frame, and the tiny jigsaw pieces that make it up.
*In case you are not familiar with these snowy metaphors, a debt snowflake is finding tiny amounts of money in your budget to repay debt. Not using the company vending machine each day, for example, and instead putting $1.00 in a cup each time you would normally buy a candy bar. At the end of a week you would have $5.00, at the end of the year you would have $260 - put that on your credit card in addition to what you normally pay and that is nice chunk of change.
A debt snowball is using snowflakes and other methods to pay off your smallest credit card, then taking that payment and tacking it on top of the payment for your next largest card and so on. Look up books by Dave Ramsey for more information.
A debt avalanche is a similar idea, but instead of tackling the smallest card you go after the biggest with the highest rate. It takes longer to pay off your first card, so unlike a snowball, you have less immediate gratification, but the numbers guys say it saves a bit more money. In my opinion, either plan is fine - just as long as the debt is shrinking.
The question might be, why are all these metaphors about snow? And why not the "Black Ice" Debt plan, the "Dirty Chunks of Ice From Under the Wheel Wells of Cars" Debt plan, or the "I'm Sick and Tired of Shoveling My Driveway" Debt plan? Hmm... can you tell it is winter where I am?
Photo by: Lapstrake