The 3 Pronged Approach to Financial Goal Setting

by Adam on March 19, 2010

Over the last week Magical Penny has been exploring the concept of focus when it comes to growing your pennies. Previous posts have explored this subject in the context of short, medium and long term goals. But should you be working on all 3 types of goal at the same time?

A case for single-minded focus:

If you have lots of debt and are reading this site you’ve most likely had an ‘a-ha’ moment, a lightening flash of clarity, where you realise that your debt level is unsustainable and you need to make drastic changes. Whilst I have never been in that position myself, many bloggers have, and many turn to Dave Ramsey’s baby steps.

The baby steps are 7 steps towards financial independence and the creator, being a proponent of the power of focus,  insists that you only take one step at a time.

The Baby Steps

#1 $1000 emergency fund

By first saving about £655 you can cover small emergencies without turning to more debt

#2 The Debt snowball

You begin paying off your debt with intense focus with minimum payments on all of the debts apart from the smallest debt, which you attack with every penny you have. Once paid off the first and smallest debt you keep your focus by working towards paying off the next smallest debt until all debt is eliminated (for other debt strategy’s click here)

#3 Three-six months of expenses

Once all the debt is gone you then save for a bigger emergencies like losing a job or needing a new car.

#4 Retirement savings at 15%

Only once you are debt free and have a strong emergency fund do you begin saving for retirement, and then only 15% of your income

#5 College-saving

With hugely expensive university fees to pay Dave encourages parents to save for their children’s higher education next. Now that the UK is following the US model of tuition fees, a new generation of British parents should consider putting money away to cover this too. If you’re in America consider saving in a 529 College Savings Plan. UK readers can stick to ISAs -more infomation to follow shortly.

#6 Pay off the house

Dave evangelises being totally debt free including your house as soon as possible. Before you do any other saving or investing (with the retirement baby step as the exception) he shouts on his radio show to pay off your house saying that the garden grass beneath your feet will feel much better once your house is truly your own.

#7 Invest and grow wealthy

Once you’re walked up all the baby steps there’s nothing left but invest some of your money and give lots of it away!

Many people love Dave Ramsey and his ‘Baby steps’ because they provide an easy-to-understand structure.  As you are not meant to skip any of the steps it also helps with financial focus too. However, I feel it’s too restrictive and, perhaps controversially, believe that by focusing on more than 1 goal you can make more progress.

Magical Penny’s 3 pronged approach: the powerful way to keep you financial goals on track and grounded

UK electric plug

Firstly to address the problem with Dave Ramsey’s single focus ‘Baby steps’:

Beans and Rice, Rice and Beans

Even with intense focus, paying off debt can take a long time. Would you feel comfortable only having £650 to your name while you paid off your debt?

For some being uncomfortable helps them focus on getting out of debt –perhaps by getting an extra job or cutting their lifestyle back, way back to “rice and beans, beans and rice”. However, I’d rather be in a position of financial strength with more emergency savings before tackling my debt. For me knowing I had pennies in the bank would help me focus on eliminate the debt. That said, this is mere speculation as I have never had consumer debt. If you have, I’d love to hear your thoughts on Dave’s approach.

Multi-Focus No No

Dave’s plan requires focusing on one goal at a time but personally I would find it disheartening not to be able to save for a few different goals simultaneously. For me beginning a savings fund for a medium term goal makes what I am saving towards closer to reality, helping me to focus my spending and saving better than if I were only saving for one thing at a time.

By diffusing my savings goals it does take longer to reach each goal but in most cases I’m happy to wait. The wait helps me to evaluate my larger scale purchases and also adds another hurdle to avoid lifestyle inflation. To give a real example, I could currently afford to buy a car when I eventually pass my driving test (don’t ask!) but this would mean I would empty my ‘house deposit’ fund. Psychologically this fund is important to me so I’d rather save up for a car separately than have to start my ‘house deposit fund’ from scratch, even though buying a house is at least 5 years away in my mind.

Waiting for Long term

The power of compounding returns is mind-blowing so I have reservations about any plan that puts off saving for the long-term. Whilst Dave is right to encourage people to get out of debt, I feel that not all debt is equal (particularly UK student loans) so with the exception of higher interest-rate debt, you should consider starting your long-term savings as soon as possible. Time goes by quickly and there will always be something stopping you from saving for the long-term if you don’t make the commitment to put some pennies away for your future.

UK plug socket

The Magical Penny approach: Save Save Save

Ultimately when it comes to creating your own budget I encourage you to consider the Magical Penny 3 Pronged Approach of working towards short, medium and long-term goals at the same time.

It might seem like a lot of saving and it won’t always be easy but doing so can have a powerful effect on your life. Just be sure not to have too many sub-goals or you risk spreading your attention too thinly. If this happens and you find yourself feeling overwhelmed, lacking focus or simply becoming impatient, then perhaps a single focus approach is best for you! The main thing is that you have a plan –the surest way to be successful at growing your pennies, regardless of the time horizon.

What do you think works best?

Recommended Reading

5 Pracitical tips for Saving money. JD Roth, author of ‘Your Money, the Missing Manual’ and Get Rich Slowly touches on this very subject in a recent interview @Oreillyanswers

Not Personal finance related but I enjoyed reading about how to keep track of what you learn. Bottom line: Keep learning and refreshing your brain  @Freestylemind.

Have a great weekend and thanks for stopping by. If you haven’t already, be sure to sign up for the Magical Penny free newsletter, follow Magical Penny on Twitter and Facebook, or simply make my day by sending me an email!

{ 7 comments… read them below or add one }

The other Adam

Hi Adam. Great post yet again!
I’m going to try and keep my comment short this time. I actually think it is possible to almost mix the two together.
I personally suffer with lack of focus. I would assume that I would find it very difficult to focus on all 4 of my goals at once, which are to save for retirement, save for future childrens college, save for my new house (long, medium and short term goals), and on top of all that try to pay my debt off as well (student loan and mortgage). Just thinking about it gives me a headache!
So have I gone with the one step plan? No. I would find it excruciating to have some of my goals so far out in front of me. So I found a way (obvious as it may be) of taking the responsibility of most of it away from me, leaving me to focus on one thing at once! As Adam has said numerous times – AUTOMATE YOUR SAVINGS. My company looks after my pension (although I can review it once a year), and it’s a pretty good pension too, and I have standing orders for my medium and short term savings. So I’m already achieving 3 of my 4 financial goals without even thinking about it. This leaves my mind free to focus on paying off my debt!
I realise that lack of focus on my savings will only allow me to be comfortable in future rather than make me filthy rich. I think that would require a lot of focus on investments, which to be honest go straight over my head. But I am happy being comfortable, and I will feel a great sense of achievement if (or when rather) I can send my future children off to college without them being burdened with a student loan, or when I get to retirement and I have a nice amount saved for my later years.
So yes Adam, I agree with your 3 pronged approach. I’m just “getting someone else to do it for me” so I can focus on one thing at once!


About this Dave guy. He makes his money by selling advice to already debt ridden people – i.e. People who must already have a made a habit of frivolous consumption. Great business strategy I have to say.

Regarding his baby steps approach, he’s obviously simplified his advice as much as possible as his target audience is obviously a bit…erm….’challenged’ when it comes to financial planning. Adam, I think your target audience is a fair bit above that level, and hence your strategies make more sense, to me anyway. Keep it up.

Rightly Knightly

I love the little exceptions you sneak in for UK Student Loans into almost every article now.


@The Other Adam -I’m glad you agree with me. However I understand that there is some merit focusing solely on one goal at a time as it gives you a boost and allows you to see that you are gaining traction with your finances.

@Sean -Dave certainly is a good salesman but I think he gets away with it because he really is sincere too- listening to him from a British perspective is hilarious as he definitely couldn’t get away with his style in the UK -us Brits prefer subtle humour and sarcasm!

@Rightly Knightly -long may my student loan caveats continue! 😉


I really like when people are expressing their opinion and thought. So I like the way you are writing


Not bad article, but I really miss that you didn’t express your opinion, but ok you just have different approach


@Rolsworth -thank for the kind words -I do have some great commenters on here don’t I? I think the commenters are the best part of a blog so I feel very fortunate that people are stopping by and giving their opinion.

@Trooper: My opinion is the ‘Magical Penny approach’ – I can see the benefits of a gazelle-intense focus but I think it’s not that hard to have 3 or 4 goals at the same time as they can motivate you in different ways and means you are less likely to get ‘goal-burnout’. Thanks for stopping by and giving me an opportunity to clarify my position -of course you have to make your own choices but reading other people’s can give you perspective and clarity.

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