When choosing your path…
Two days a week, our son spends time at his grandparents’ house. They live clear across town from us – about a 13-mile drive. The ride is most efficient on the freeway although there are other ways to get there. As I was picking him up at the end of the day this past week, I entered in directions to our house on my phone’s map so I could see what the traffic would be like. Driving those 13 miles in rush hour can feel like a long drive despite the relatively short distance. When I saw the map and that there were at least two patches of freeway that would be bumper to bumper, I opted to take surface streets home. The map told me it would take 19 minutes to get home on the freeway, and 21 minutes on surface streets. Somehow, though, taking the surface streets, which only stopped at stop lights and not because of bumper-to-bumper traffic, felt less boring and more like progress. Knowing we would be in motion somehow made more sense to me than the otherwise shorter trip on the freeway. After nearly thirty minutes on surface streets, we made it home.
While I’d like to say this is a less common choice I make, it’s not. I don’t enjoy driving on the freeway and hate getting stuck in traffic. The movement of the regular ebb and flow of traffic on surface streets makes me feel like I’m getting to my destination in a better way, even if objectively I’m not.
I see something similar to my driving patterns with some of my clients and their finances. Instead of choosing a path that might have some challenges but will ultimately be the safest and most efficient, people tend to choose a more convoluted path. What I often see is people making lots of small moves that make them feel like they are getting somewhere or making progress when in fact it might be slowing them down. I see this when people attempt to save, pay off debts, and invest simultaneously – only being able to make very minimal progress in each one, and perhaps not creating the necessary foundation for any single one to be successful.
Take for example, this story about clients paying down debt. I have clients that I have witnessed have an incredible transformation when they decided to choose the one, maybe more tedious, but nonetheless straightforward, path. For the last ten years, they have paid $1000 per month towards student loans. That $1000 was spread out amongst nearly a dozen loans. After ten years, they still had all their loans and some of the balances had increased instead of decreased. When we started working together, I suggested they order their loans smallest balance to largest balance. After ordering their debts smallest to largest, they would pay the minimum required on every loan (which during the last two years was $0 because of the pandemic moratoriums) and put the balance of their $1000 to the smallest loan. Within the first month, they eradicated an entire loan. A loan they had carried around for more than 10 years! In the last year, they have managed to pay off more than $40,000 of debt. They did this by putting all of their extra money to debt – they stopped investing in their companies’ 401(k) plans temporarily and put every bonus they received towards theses debts.
This method of paying off debt – ordering your debts smallest balance to largest - is called the snowballmethod. There’s another method with just as memorable of a name: the avalanche method – a method where you order your debts from largest interest rate to lowest interest rate and pay off the loan with the highest interest rate first. The touted benefit of the avalanche method is that you save money on interest. The snowball method on the other hand, works by providing small wins and momentum. If your largest interest debt is $40,000, it’s going to take a long time to feel like you make progress. Likewise, a $40,000 with a 20% interest rate (a common occurrence for credit cards) will be earning nearly $8,000 in interest each year.
When it comes to paying off debt, regardless of the method you ultimately choose, the point is this: stick to one straightforward path, even if it feels slow, boring, and tedious. Small moves in lots of places will tend to be even slower, use more energy and resources, and be more tedious in the long run.
This is true for when you’re saving and investing, too, and when you’re working towards these goals personally or in your business. Focus on one thing and have a clear plan for it. Be wary of doing lots of small things that might feel like progress but in the big picture are diluted by their lack of focus.
My husband, a big advocate of freeway driving and one who abhors driving on surface streets, reminds me that most accidents occur at intersections – something freeways don’t have. Much like this metaphor for finances, sticking to that straightforward, well-defined path, will likely be a safer bet for you financially, too.