In his great book, Atomic Habits, James Clear describes the hill that most progress dies on. He terms this hill the “plateau of latent potential.” I love this concept. And I think it can very nicely be extended into the realm of personal finance as the “financial plateau of latent potential.”
Let’s look at some important ways that we can overcome this financial plateau to reach financial success!
First, what is this plateau of latent potential?
When we all think of progress, we imagine a straight upward trending line. We expect that we will start something and continue to improve steadily before ultimately achieving success in a relatively short period of time.
Well, this is definitely not how it works.
In reality, when we build a new habit or seek a new goal, we experience some immediate gains. But then we fall into the valley of disappointment (another term borrowed from Mr. Clear). We don’t gain as much as we expected and even when we do, we reach this plateau of disappointment where our progress appears to stall.
This leads to frustration. And unfortunately it all too often leads to us quitting or reverting back to bad habits.
But this plateau of latent potential is not a wasteland
Here’s a great example.
Imagine you want to boil a pot of water for tea. You put a tea kettle filled with water on the stovetop and turn on the flame.
It starts out at 70 degrees Celsius. Nothing is happening…
A few minutes more and it’s at 80 degrees. Still nothing…
Now 90 degrees. Nothing…91 degrees…95 degrees…99 degrees…nothing…
But then, it heats to 100 degrees and wham! All of a sudden, the water starts bubbling profusely and the kettle whistles at the top of its lungs. (This is all assuming of course you at sea level where water boils at 100 degrees Celsius…)
Was that last degree any more or less important than the degrees that came before it? No, of course not! Without the previous degrees, you would never reach the boiling point. Those previous degrees created the potential for that magical last degree to create its glorious cacophony.
The same goes for the plateau of latent potential. You are not seeing the progress that will lead to success. But you are building the potential for that success to happen. From the outside, it will seem like an overnight breakthrough and success.
But you know that it was really a slow build up and persistent effort that led to ultimate growth.
The key then becomes learning how to persevere through the plateau!
It is an easy extension to put this in terms of a financial plateau of latent potential
- Do your first budget and nothing will change in your net worth.
- Go from saving 0% of your pay check to 1% of your pay check every month and your savings account barely moves.
- Start investing in boring low cost, broadly diversified index funds and your yearly gains seem paltry.
- Buy one investment property and the yearly income is just a small fraction of your active income.
These actions on their own seem highly unlikely to lead you to financial freedom. They just barely seem to move the needle. So it is easy to try them and then feel like they don’t work and fall back into bad financial habits.
But put these habits together persistently over time and I can guarantee you will reach financial freedom and well-being. It’s not a matter of if but of when.
The key becomes sticking with it through the financial plateau of latent potential until you reach that awesome exponential growth and success.
How can we all do this?
3 keys to overcome the financial plateau of latent potential
These keys are going to be less about specific steps, like increase your savings rate by 1% each month. Instead, they are going to be more systems based recommendations to guide you through the times where it feels like your financial habits and sacrifices aren’t doing anything (while in reality they are getting your financial tea kettle ready to boil…)
1. Change how you think about goals and focus on systems
I absolutely love goal setting. I do believe that it is a very important component of success.
However, I also acknowledge that being overly focused on our goals can be detrimental and even erode happiness and our ability to stay in the GAIN.
So how can I remedy these two contrasting goal perspectives?
The answer, I believe, is to create your goals. Make them big and lofty and challenging. Align them with your passion. But then do something different. Don’t live and die by your goals. Instead, use your goals to help you create systems that are enjoyable and effective in helping you to reach your goals and then some.
What do I mean by this?
In the past, I have set a goal for myself to lose 10 pounds. I improved my diet and exercised at a pace much greater than typical for me and lost 10 pounds. I reached my goal!
But what happened next? I fell back into bad habits because my goal was achieved and I no longer had that aim to reach for.
A better idea would be to create a system where I continually improve my diet, limit snacking, and exercise regularly. This system would align with my goal of losing weight (and ultimately being more healthy). It would also allow me to persist beyond arbitrary markers like a specific weight.
What about in personal finance?
Same goes for anything else including finances. If your goal is to reach a specific net worth and you save and invest, save and invest until you reach it, I worry that it will feel pretty hollow. Plus you probably didn’t enjoy yourself along the way.
That’s why Selenid and I have worked so hard on establishing our “why” for financial freedom. This why is what we built our financial systems around. When we struggle or don’t always see the obvious growth, our why reminds us of the passion and purpose with which we created these systems.
But to be honest, most of the times, we do enjoy our system because we built it the right way and focus on that, rather than the long term goal that we know we will eventually achieve. Even though it doesn’t always necessarily feel like it.
2. Automate, automate, automate
We tend to get more frustrated when we have to do little things actively over and over and over again. Especially when we don’t see immediate gains. This is just human nature.
There are two ways to combat this. The first we talked about above: building habits. Once a habit is built you really don’t notice or mind the little thing you are doing. You just kind of do it. And take pride in doing it.
But sometimes there are little tasks we have to do repetitively that don’t line up with our passions and thus don’t fit well into our habits.
This is where the importance of automation in conquering the financial plateau comes into play.
Let’s use budgeting as an example
Budgeting is not the most fun thing in the world for most people – although I do like it. But, like it or not, budgeting is a necessary step in the path to financial freedom. This is especially true in the beginning as you are establishing and solidifying your savings rate.
Mapping Out My Money Flow
So my recommendation is to work to automate your budgeting in the long run. How can you do this? Well, in the beginning sit by yourself or with your partner and go through each monthly expense and balance it against your planned budget. If you don’t have a planned budget, just use my template to create on.
As time goes on though, the variables shouldn’t change. You will make more or less the same amount most months. And in theory you should spend more or less the same amount each month. So, eventually you just need to look at the savings and make sure this lines up with your goal.
Boom. Your budget is automated.
Watch Jordan’s Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!
Same goes for investing
Create automatic withdrawals to your investment accounts. Automatically pay off a certain amount of your student loans each month. Use a good investor real estate agent to sort through properties to find good ones to invest in that meet your criteria. Automate your tenant management like Selenid and I do.
Automation is your best friend.
3. Trust your systems after you create them
Creating a system for financial success is an obvious and important step in beating the financial plateau. But your system does not good for you if you are constantly changing it.
So you have to trust your system after you develop it. Be persistent.
This includes ignoring the noise when the stock market is down and everyone is selling. Also ignore the noise when the markets are up and people are bidding up the price of
It means not being upset when someone else hits their boiling point and you are not at yours yet. Trust that it will come. Don’t give up now or over-reach and end up hurting yourself.
Lastly, this also means not handing over the steering wheel of your financial future. While using a financial advisor for the right advice and the right price is not bad, don’t get frustrated by your perceived lack of progress in the financial plateau and start paying someone more than necessary for their “financial expertise” because they tell you they can get better returns.
Putting it all together
As I’ve talked about before, the recipe for success is not complex. It’s not easy. But it’s not complex. Find your passion and follow it persistently. Remember, enthusiasm is common, endurance is rare. Be the one who remembers it’s a marathon not a sprint.
In addition to this,
- Remember what goals really stand for
- Build systems
- Automate your tasks, and
- Stick with it
Do this and you will conquer the financial plateau of latent potential and reach financial freedom!
For Selenid and me, our system for financial success includes:
- Reading 10 pages of a finance book every day
- Reading one finance blog post a day
- Increasing our savings rate by 1% each month while we were in training
- Maintaining a savings rate of >20% each month (Our current savings rate is >40-50%)
- Paying off enough of our student loans each month to be debt free in 5 years
- Automatically maxing out and investing in our 403b
- Running our (now automated) budget once a month
- Buying 1-2 cash flowing rental properties each year
You can learn even more about our simple habits to financial success here.
What do you think? Have you experienced the financial plateau of latent potential? How did you respond? Did you think about giving up? Let me know what you think in the comments below!