When you don’t plan your financial life, you are in danger of “bleeding” financially. Every little “cut” that isn’t given attention hurts you—today. And while you may not be in danger of immediate financial demise, you must recognize that conditions left untended will result in negative consequences.
Remembering that everyone’s situation is different, some possible examples of financial bleeding could be:
- credit card interest
- low deductibles on auto and homeowner’s insurance
- income taxes on savings and investments
- institutional surrender charges
- term life insurance premiums
- loans against qualified retirement plans
If you are bleeding, and if these cuts are affecting your financial health, the normal, rational response is to take corrective action now. Even if they recognize the financial bleeding is occurring in the present, some people will, almost from habit, argue that “Iit’s just a scratch” that will heal on its own.
No. Not true.
Once a financial loss is incurred, the bleeding doesn’t ever really stop. The opportunity cost of losing money because of a poor decision compounds against you forever. The financial “mistakes” made early in life are the most costly, simply because the lost opportunity costs that you incur as a result accrue against you for the longest time.
Suppose you make a series of decisions that lead to an additional $1,000 of financial costs at age twenty-five. Those mistakes could theoretically compound against you for the next fifty or sixty years. Calculated at 8 percent annually, the $1,000 “cut” left unattended has the potential to “bleed” you of $16,000 by age seventy. In the context of considering opportunity costs, making similar financial mistakes at seventy doesn’t do nearly as much damage. This perspective puts a high premium on becoming financially literate and efficient as soon as possible. True financial planning should be applied to stop the bleeding now so that you have the best possible chance of succeeding tomorrow. Further … What you do don’t do today has a big impact on not just you, but future generations.
Because many Americans associate their “tomorrow” with their own retirement, they assume that the consequences of their financial planning end when their lives end. But in ways that you might never imagine, your financial plans have ripple effects that extend far beyond your lifetime. Lost opportunity costs reverberate through successive generations.
