Incremental Finances – Part 3
A word to the wise:
Even if you are one of the lucky few who were born into wealth or found a career which you love and pays extremely well, being financially smart is still important. For those of us who have student debt and expenses that we need to focus on, it is doubly important. If you don’t have access to large sums of money, learning to control the incremental progress of your finances can be the trick for paying down debt and gaining wealth.
I know this is a length article, but stick with me, it is an important concept that everyone should learn. I’ll do my best to provide actionable steps so you can take charge of your finances!
Now you can argue that it is impossible to get 1% better each day with your finances because there is only a limited amount of money you have each paycheck. But don’t let that deter you from trying. You would be surprised how many financial choices you make daily, weekly and monthly that affect your finances quite a bit!
- Buy breakfast on the way to work rather than making your own at home.
- Buying scratch tickets and lottery tickets.
- Buying hard copy books rather than e-books or using an e-library.
- Buying single products when you could buy bulk.
- Commuting to work when you could carpool with an associate or fellow student.
You get the picture. Our everyday choices, whether you notice yourself making them or not, add up quickly when it comes to finances.
So how to we utilize the concept of Incremental Progress for our financial success?
Simple, start small and get 1% better each day.
For example, if you find that you are often running late for school or work and decide that it would be easier to just buy a breakfast rather than making your own, you are making the choice to take the easy route. However, the easy route does not mean it is the right choice.
Instead of spending $7.50 a day on a breakfast sandwich and drink each morning. You could make the small change change to buying eggs and bread on sunday evening for $5.00 a week! Now I understand, because I am guilty of buying breakfast on the way to work on occasion, that it can be a difficult switch. It involves waking up earlier, preparing your own meal, and giving yourself enough time to eat and get to work/school on time.
Using Incremental Progress for daily habits:
Monday – Friday = Purchase lunch on the way to school/work
Total breakfast cost this week is $37.50 (5 x $7.50)
Monday = Make breakfast at home
Tuesday – Friday = Purchase lunch on the way to school/work
Total breakfast cost this week is $35.00 (4 x $7.50 + $5.00)
Monday – Tuesday – Make breakfast at home
Wednesday – Friday – Purchase lunch on the way to school/work
Total breakfast cost this week is $27.50 (3 x $7.50 + $5.00)
Monday – Wednesday = Make breakfast at home
Thursday – Friday = Purchase lunch on the way to school/work
Total breakfast cost this week is $20.00 (2 x $7.50 + $5.00)
Monday – Thursday = Make breakfast at home
Friday = Purchase lunch on the way to school/work
Total breakfast cost this week is $12.50 ($7.50 + $5.00)
Monday – Friday = Make breakfast at home
Total breakfast cost this week is $5.00
Total cost of original breakfast 5-week schedule = $187.50 ($1950 annually)
Total Cost of Incremental Progress 5-week schedule = $137.50
Total cost of Future breakfast 5-week schedule = $25.00 ($260 annually)
Using Incremental Progress for debt reduction:
During my years in school, I was able to get a government student loan that does not have any interest or required payments until 6 months after graduation. It was great at the time I got it, but totally sucked 6-months after I graduated!
When it came time to start paying back my loan, I began looking through my finances to see how much money I would be able to put towards my debt each month.
At the time I was not paying any rent, so I figured I could afford $700 a month! But at the same time, I didn’t want to leave myself with no money after making my debt payments, car payments, gas money and groceries. So instead I told myself I would start small and gradually build up to $700 a month.
For the first month I put $300 directly onto my debt. This was less than half what I thought I could do, but I was not used to making the payments yet. At the end of the month, any remaining money I had was also put towards my debt.
During the second month I put $400 directly onto my debt. At the end of the month, any remaining money I had was also put towards my debt.
The third month I put $525 directly onto my debt. Being able to put 75% of my estimated total onto my debt felt good and because I was making incremental progress with my payments, I was able to adapt my other spending habits in order to still have money for living my life!
Finally, on the fourth month I went all in and put $700 directly into my debt in one month!
So why did I do it this way?
One issue a lot of us have is that we spend all the money that we have each paycheck. When we get a raise at work, instead of thinking “great, now I can save more!” we often think “great, now I can upgrade my car!”
This is a backwards way of thinking. When we start to earn more money, we should focus on building wealth not owning more expensive things. The idea is to build wealth so that we can than live the life we want, buy the things we want and retire comfortably, with financial control. If we immediately buy new expensive things, without growing our wealth, we actually stay in the same financial situation of living paycheck to paycheck, with fancier things.
By using incremental progress, I was able to train myself to save more and more each month. If I had started saving $700 dollars a month right away and continued spending my money the way I was used to, I would have had to start racking up debt on my credit card to pay for everything.
Instead I was able to put away $300, $400, $525 and than $700 over the course of 4 months. In that time, I was able to, week by week, start lowering my spending habits and focusing on my priorities.
Paying down debt is important; however, we need to make sure that we do not over save and leave ourselves without money for living our life. Start small and build up to an aggressive but manageable amount each month. And remember, you will need to re-evaluate your debt payments as your life changes. Now that I am paying rent again, I estimate I will only be able to pay $300-$400 per month on debt, and I am starting the incremental progression again from the beginning! This strategy can be used whether you are able to save $100 dollars a month or $10,000, the concept is the same.
Saving Money with Incremental Progress:
If your public-school education was anything like mine, you would have heard of the math question:
Would you rather have $1,000,000 dollars right now, or get a penny that doubled everyday?
As soon as the question was asked the classroom was instantly divided. Most of the students jumped at the opportunity to get $1,000,000 while a couple students picked the penny, often thinking it was a trick question.
The teacher then explained to us the answer:
- Day 1 = $0.01
- Day 10 = $5.12
- Day 18 = $1,210.72
- Day 25 = $167,772.16
- Day 28 = $1,342,177.28
- Day 31 = $10,737,418.25
This is the power of compound interest. With small incremental progress, the money starts to grow. As time continues, the effects of that progress become greater and greater. Of course, this is an extreme example and is extremely unlikely to happen to any of us!
Here’s an example of financial incremental progress that we can mimic for saving our money.
Saving $1,000 in 26 weeks!
What if I told you that you could save $1000 in 26-weeks? Not only that, you could also save an additional dollar!
With this very simple and easy strategy, you could have $1,001 in 26-weeks total. How you might ask? Simple, incremental progress!
On week 1, we start by saving $26 dollars. Each week we add $1 more to our savings; 26, 27, 28, 29… and so on. If you don’t believe me, here’s a spreadsheet I created to illustrate the power of incremental savings:
This is a great example of the power of incremental progress. Consistency is key. However, consistency with incremental progress is significantly better.
If we had been consistent, saving $26 a week for 26 weeks, we would finish the money saving challenge with $676. Not bad!
However, if we use incremental progression by added 1 dollar a week, we would have a total savings of $1,000 in only 26 weeks!
Additional Savings Ideas:
There are a lot of little ways you can save incrementally. There will be times where you want or need to purchase something in a short time frame. In these exceptions you may save more aggressively or as fast as you can. However, for most things in life, you can incrementally save and reap the rewards at a later date. Here’s a few things I do with my savings each month:
$150 is put into a retirement savings account.
I am not very aggressive with my retirement fund because I am still paying off debt. However, the small payments add up. Whenever I have leftover money from the previous paycheck, I will often put some of it towards my retirement as well. I started saving roughly 9 months ago and have accumulated over $2500.
$150 is put in an emergency fund.
Having an emergency fund is one of the most important things to have in your portfolio. I didn’t actually start this until about 6 months ago and tried to save as much as I could spare into this account. At first, any extra money I had went into this. Recently, however, I set up an automatic transfer of $150 a month and have a current savings of approximately $1750. My goal is to get at least 3 months of expenses saved incrementally prior to shifting my focus more heavily towards debt payments.
$100 is put into my “vacation fund”.
I love travelling! Unfortunately, travel is an extremely expensive hobby to have for the most part. I utilize incremental progress by saving $100 a month. This adds up over the year and guarantees that I have at least $1200 every 12 months! In addition, when I know I will be traveling somewhere specific and have a set date, I will make a budget and save as much as possible for fun money. But those savings are specific to that trip
$50 is put towards my “future family fund”.
I am still fairly young, but I do know that I will have a family in the future. I can only imagine how financially stressful it can be to have a wedding, children, family vacations and everything else involved with being a family. I don’t want my future self to tackle that life milestone with $0 is my pocket. Every bit counts, so I am starting small and will increase incrementally the closer I get to that time of my life.
$10-25 per paycheck towards my “gift fund”.
Have you ever gotten to the holiday season and realized you have no money for gifts? Or worse, you made it through holiday season and realized your credit card was racked up higher than you could possible pay off in a month!? Well so have I. So, to fight back potential gift giving financial problems, I’ve begun saving small incremental amounts each paycheck so that I have money sitting in the bank for the season. This also really helps with birthdays, anniversaries, mother and father’s days, and any other holiday you can think of that involves gifts.
Now remember, these numbers worked for me in my current life situation. If you make more money than most, save more! If you make less money than most, save less! The important part is that you do save money.
And most importantly, it is important to spend within your limits. Be financially savvy, not emotionally driven!
Some people believe that because they can’t save much, they won’t bother to save at all. That is not the way to think about it. Any savings at all is better than no savings.
On the flip side, some people make so much money they don’t feel the need to save because they have no much money flowing into their accounts regularly. This also isn’t the way to think about saving. You should also make sure to save money and invest in your future. Your present life circumstances may not stay the same, and you may rely on any savings you have!
Incremental Finance in review:
Okay, I’ve told you my thoughts on incremental progress and its uses in finance. I’ve also outlined how I personally use incremental progress to not only pay off debt but save money as well. Now it’s up to you to take initiative.
- Start smaller than you think you can handle.
- Increase the amounts incrementally as often as possible.
- Once you reach your peak, stay consistent.
- Look for ways to increase your earnings and decrease your spending.
What ways do you think Incremental Finance can help your current situation? If you’ve already been utilizing this technique, what worked best for you and what didn’t?