DR Podcast 309: The Progress Principle


Too often, when setting financial goals, we become discouraged. It’s hard to see the point when you don’t feel like you’re making progress. If you want to feel like what you’re doing is worthwhile, understanding the Progress Principle, and how to apply to your finances, is vital.

In this article, we’ll take a look at what host Rob Berger has to say about the Progress Principle and how it can help you overcome the feeling that you’re not getting anywhere with your money. Rob also has some great ideas for implementing the Progress Principle in meaningful ways–helping you stay on track with your long-term financial goals.

What is the Progress Principle?

The idea behind the Progress Principle is that humans need to see themselves moving forward in order to remain motivated. While we’re looking at progress as it relates to money goals, the reality is that this principle can be applied in other areas of your life.

Rob points that many people don’t see the point of something, like saving for a retirement 50 years down the road, when we aren’t seeing progress today. Additionally, we can be overwhelmed by looking at a huge financial goal–such as amassing $1 million–and decide we’ll never make it.

The Progress Principle says that if you can measure your success, and see how you’re working toward your ultimate goal in manageable steps, you’re more likely to stick with it. The key to long-term financial success is in seeing how far you’ve come.

Here are seven ideas that can help you apply the Progress Principle to your financial goals.

1. Track Your Net Worth

The most important thing you can do is to track your net worth. Your net worth provides you with an important snapshot of where you’re at financially during a particular moment in time.

Your net worth takes your assets (savings, investments, etc.) and subtracts your liabilities (debts). Over time, you want to see your net worth improve. If you have a lot of debt, watching your net worth move into positive territory can be motivating.

Additionally, as your retirement nest egg grows, your net worth will go up. While it’s not always a straight line upward, especially when the markets are volatile, net worth can still give you an idea if you’re on the right track.

You can use a free tool like Personal Capital to get a holistic picture of your finances and measure your progress, or even just keep track on a spreadsheet.

Related: Personal Capital Review – A free financial dashboard to track your finances.

2. Debt Snowball

If you’re struggling with debt, one of the best ways to measure your progress and feel motivated to keep going is to use the debt snowball.

With this strategy, you figure out how much you can put toward debt reduction each month. You make your minimum payments, but put a little extra toward the debt with the lowest balance. You never change how much you put toward your debt each month, but as you pay off each balance you take what you were paying on the previous debt and use it to pay off the next debt on your list.

Starting with the smallest debt allows you to enjoy the benefits of a quick win, letting you savor your progress and see that your next debt can be paid off as well. As you knock off each debt, you feel good about your progress and are ready to keep going.

You can also use the debt avalanche, which has you tackle debts in order of highest interest rate, rather than focusing on the balance.

3. Debt Thermometer

Another strategy to help you utilize the Progress Principle is the debt thermometer. No matter how you decide to tackle your debt, keep track of how much you’ve paid off.

Make a giant thermometer with the total debt you want to pay off. Mark off increments that make sense to you–$1,000, $5,000, or $10,000. Once you’ve paid off your debt in the required increments, you color in the thermometer. It’s a great visual to show you how far you’ve come and keep you motivated.

At particular milestones, consider holding a little celebration. You don’t want it to be expensive–or put on your credit cards–but it can be a fun way to acknowledge your progress and gear up for the next phase.

4. Savings Rate

Figure and track your personal savings rate, with the ultimate goal of getting to 20% of your income.

Most of us can’t just wake up one day and be saving 20% of our income. Instead, you can set up a system that allows you to increase your savings rate incrementally.

Start by deciding to save 3% of your income. As you work on creative ways to free up that money for savings, you’ll start seeing other ways you can set aside more. Bump it up to 5% of your income. As you keep bumping up your savings rate, you’ll see growth in your savings and investing accounts, and that will encourage you to keep at it.

5. Track Investment Income

One of the problems with tracking annual investment returns is the fact that a bad year in the stock market can be disappointing.

While there’s nothing wrong with tracking portfolio returns as a measure of overall progress, and as a way to remain motivated to invest, Rob points out that it might make more sense to track your income.

Look at the dividends and interest you receive. Rob even adds in the interest he gets from his savings accounts.

Income can be a more encouraging number because dividends might not go down–even if a stock price falls. Using the example of Apple, Rob points out that the company is still paying its dividend, even though the share price has fallen recently.

Each year, as you grow your portfolio, your dividends and interest income should go up. You can choose to reinvest the income, but no matter what you do with it, watching it increase over time can show you progress and keep you focused on using investments to reach your goals.

6. Age of Money

If you use YNAB to track your finances, you might see that they provide a number called “age of money.”

Basically, your age of money reflects how long it sits in your account. So, when you get income, if it takes you 15 days to spend it, the age of your money is about 15 days. The goal is to get that age up as much as possible.

Consider a strategy in which you spend money earned the month before. For example, the money you spend in June should have been banked in May, putting you at least a month out. You can watch your money get “older,” and that will give you an idea of your progress toward financial freedom.

7. Use the 7 Levels of Financial Freedom

Finally, you can use the 7 levels of financial freedom to chart your progress over time. The first level focuses on having a buffer of one month’s worth of expenses available to you. The levels progress until you reach the top tier–having enough money to live on for 25 years.

It’ll take some time to get to that point, but using these levels can help you make a roadmap for success, allowing you to move up through the levels over time.

Use one or all of the above strategies to track your financial progress and you might be surprised at how motivated you remain. When you have a way to make big goals seem doable, it’s easy to keep moving forward and eventually reach financial freedom.

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Topics: Personal Finance TipsPodcast

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