Last week I had the pleasure of presenting a budgeting workshop for a great group of people at my old company. Thanks again for inviting me Cheryl! There were lots of good questions.  However, there was one in particular that kept me thinking after I left. In hindsight I wished I’d answered it better. So here goes.

The question was: “Spending is really fun. How do you make budgeting fun?”

Of course the question isn’t really about the act of making a budget, but more about the act of controlling spending, with an eye toward increasing saving. In other words, how do you make saving fun. The fact that spending is fun is among the reasons so many American’s save so little. The Federal Reserve reports that the average american saves just 5.7 percent of their after tax income. If that were your savings rate, it would take you nearly 18 years to save a single year’s worth of your income, making it hard to retire with your current lifestyle.

My answer was to use myself as an example. I declared how I loved the sight of my savings going up in value. That made me sound like a nerdy bean counter (which, of course, I am). What I left out was why that made me happy. It made me happy because with every rise in the value of our savings, the closer my husband, Jeff, and I came to realizing our goal of leaving work in our 50’s. The reason that I knew we were getting closer was because we had very specific goals.

As it turns out, achieving goals is a direct path to happiness. Psychological research shows that “the successful pursuit of meaningful goals plays an important role in the development and maintenance of our psychological well-being”. In addition, the successful achievement of goals is a self reinforcing motivator. The more progress we make on our goals, the more we are motivated to take more actions that help move us further toward our goals.

Think about a time when you completed a project. You were jazzed weren’t you? It was an accomplishment, and you had worked hard for it. Maybe you even celebrated.

Projects are relatively short term in nature and very tangible. The problem with saving for the distant future, when you are no longer working for pay, is that it is, well, distant and not very tangible. It’s hard to quantify how much you need to save, making the visualization of a savings goal a little blurry. There is a lot to consider, like where and how you want to live, whether you’ll be healthy and more. So, many close their eyes, hold their breath and hope for the best instead of making a goal and a plan. Procrastination like this, by the way, has been shown to undermine happiness.

The secret to making saving as much or more fun than spending is to cut through all of these complicating details, and set tangible short as well as long term savings goals. Your long term goal is how much you need to have saved before you can reasonably stop working. Your short term goal is how much you need to have saved at the end of each year in order to make your long term goal. Here are three steps to help you get started.

1. Ball park your long term goal: If you don’t have specific plans for your post work lifestyle, a safe assumption is that you wouldn’t want to be forced to live on less than you do now. As you figure out what you want, you can always adjust your goals. To keep your same lifestyle when you stop working you will need to accumulate roughly 25 times what you are currently spending if you intend to stop working at a normal retirement age. From a different direction, you’ll be able to spend about $333 per month for every $100,000 you have saved.
2. Break the long term goal into shorter term steps: Of course that is a big number and so seemingly out of reach that it may be demotivating. So like any big goal, it helps to break it down into smaller goals. Set a goal for how much you want to put into savings each year. It may be hard to change your spending by very much in the short term. Some things, like debt payments or day care costs, can’t be changed quickly. You can start small and save more later as you can make more changes to your regular expenses and as your income increases.
3. Build milestones for measuring your progress: Set another goal for your total savings balance for the end of the year. Your total savings balance is dependent partially on what you contribute and partially on how much your savings earn. You don’t have to have a crystal ball about the stock market. Choose a reasonable rate of growth, like 5.0 percent, which would line up with investments where at least half is invested in the stock market. Of course your investments won’t earn that every year. Some years will be better and some worse, but it gives you something specific to measure your progress against.

Jeff and I created a spread sheet that showed a specific target balance that we hoped to achieve through savings and reasonable investment returns each year. We made an annual date to check our progress. Did we contribute what we planned to contribute during the year? Because we could control the savings part, the answer was yes. Was our balance what we expected? We couldn’t control the investment returns, so this answer wasn’t always yes, but it usually was. For the few years when the answer was no, we chose to save more in the following year to close the gap between our actual balance and target balance. We always celebrated our success, even if the success was simply to have saved what we had promised ourselves we would.

With these three steps you have a ball park understanding of the end game, a short term actionable goal for how much you will save this year, and annual benchmarks for which there are known corrective actions. Your goals are specific, short term and tangible. This is a recipe for getting the same thrill from saving as you do when you complete a project. That makes achieving your savings goals at least as much fun as spending, and the glow will last much longer.

Image courtesy of jk1991 at FreeDigitalPhotos.net