Procrastination will usually cost you money. Procrastination takes many forms. The most extreme is simply to put off saving and investing. A simple understanding of the power of compound returns and the time value of money will show how expensive a mistake this can be.
As an example: a person who saves $2000 in the first year (increasing at 3% a year to simulate wage increases) and who earns a return of 8% on her investments will amass a nest egg of $738,499 after 40 years. A person who delays starting the same savings program will end with a nest egg of $677,931. The early saver ends up being $60,569 (8.9%) better off. Not bad for a mere $2000 extra saved. (The example is a bit simplistic in that it assumes that all the savings are contributed at the end of each year. Monthly savings would result in a larger difference.
In the quest to get even a small increment in return on investment, more subtle forms of procrastination can also be expensive. Examples abound:
1. leaving money in accounts which pay no interest or lower rates of interest than can be obtained elsewhere;
2. taking out longer term loans than are needed (although this one does depend on what you do with the additional cashflow);
3. failing to pay the credit card off in full each month.
Any others?
2 comments:
2. taking out longer term loans than are needed (although this one does depend on what you do with the additional cashflow);
FINANCE SHORT TERM INVESTMENTS WITH SHORT TERM DEBT & LONG TERM INVESTMENTS WITH LONG TERM DEBT.
If you want to minimise risk, then I certainly agree that matching the duration of your investments with the duration of the associated indebtedness makes good sense.
However, given a normal yield curve, you can lower the cost of your debt by shifting to shorter term borrowings. While this can be attractive, it does increase your risks by leaving you more vulnerable to upward movements in interest rates.
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