Money isn’t everything, but any normal, rational, well-balanced human being wants a solid financial life. Granted, a “solid financial life” is a vague term, and certainly the details of what constitutes a solid financial life will vary with each individual. But the concept encompasses desires that are almost universal: to feed one’s family, secure good housing, provide education and opportunities for their children, and ensure an income in old age—with a minimal level of stress and reasonable level of assurance or guarantee.
Unfortunately, many individuals, even in the United States, fall short of reaching these primary financial objectives. Most Americans may get by, but they struggle to get ahead. A brief sampling from last week’s financial headlines: “Americans’ Retirement Optimism Likely Built on Shaky Ground,” “Future High Earners May Not Get Social Security,” “Car Shoppers Drown in Debt,” and “Risks From Falling Home Prices.”
Even if some of the headlines are hype, the underlying story is: most Americans are not succeeding in their financial planning. And for the most part, the failure is not because they lack the resources, but rather because they have been unable to consistently execute basic financial strategies.
Why do most Americans fail to achieve a solid financial life? From empirical observation and statistical surveys, those in the financial services field would answer as follows:
1. They don’t start soon enough
2. They don’t plan long enough
Why don’t most Americans start soon enough and plan long enough? You could list a number of factors that contribute to this misunderstanding. But (in our humble opinion), one of the biggest reasons most Americans don’t start planning soon enough and don’t plan long enough is because they don’t fully understand the immediate and long-term consequences of their current financial decisions. Financial planning isn’t about a better future its about a better “now.”
Financial planning is often perceived as a decision about delayed gratification. It’s something that involves “tomorrow.” A “tomorrow” mindset invites procrastination, because as long as you can put it off until tomorrow, why do it today? In our financial culture, “tomorrow” is retirement. And even though retirement is an important financial topic, it’s not urgent. So if you are:
- Thirty years old, retirement is at least twenty-five years off.
- Fifty, well, you’ve decided you want to work as long as you can, so there’s still time before you start planning for the future.
- Forty and haven’t planned, you tell yourself that you are probably going to work until sixty-five anyway, so tomorrow is still twenty-five years out.
As long as financial planning is part of your tomorrow, you will never reach your financial potential, because there simply isn’t enough motivation to act today. Discussions about products, an analysis of stock market trends, even sophisticated projections for the future don’t motivate most Americans (or anyone else), to effective financial action—to start soon enough and plan long enough. Consider the difference in urgency between an issue that you perceive as requiring immediate attention and one that can wait until later. The tine to stop bleeding is now.
Suppose on your way to work this morning you suffer a seemingly minor cut. It starts bleeding, not too much, but steadily. You apply a Band-Aid, but notice an hour later that it’s soaked. The wound doesn’t really hurt, and you aren’t panicking, but you are concerned that the bleeding hasn’t stopped. When things don’t get better that afternoon, you decide you shouldn’t wait any longer. You seek medical attention before you go home.
As you pondered how to respond to the cut, did you think “I wonder if this wound could shorten my life expectancy or affect my quality of life after age sixty?” Of course not! This wasn’t a decision about the future—it was about right now! Even though there might be long-term health consequences related to the cut, you didn’t need to reflect on possible future-related issues to conclude you needed further medical attention. It was obvious that something was wrong with your present plan. The recognition of the immediate problem prompted immediate action.
Suppose for some reason, you decided to put off examination and treatment, and just put a new bandage on it every morning. You might not die. But is there any doubt that ignoring the cut could jeopardize your long-term health? Understanding the health risks, most normal, rational people will act now. Another reason no to act now: What you don’t do today has a big impact on what you can do tomorrow.
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.
Using another simple example: Suppose a forty-three year-old father bleeds off $5,000 from his net worth through poor planning over the previous decade. He makes changes to stop future bleeding, but the opportunity costs continue to accumulate on his previous missteps. Assuming he lives to seventy-nine, and using the 8 percent annual rate, the opportunity cost calculation grows to $40,000.
Suppose this man has a daughter, aged sixteen when he is forty-three. At her father’s death, she stood to inherit his assets. Theoretically, his lost opportunity cost is passed on to her, in the form of money she doesn’t receive (the daughter is fifty-two at her father’s death). If she lives until age eighty-six (and women usually live longer than men), the opportunity cost has now reached $640,000. Take this same calculation out one more generation, and the cost of the loss is well over $3 million. Lost opportunity cost is hypothetical, but the consequences are real.
You might dismiss this opportunity cost calculation as mere speculation. After all, opportunity cost isn’t real, right? It’s a hypothetical assessment of what something might have been worth if you had it—and you don’t. But here’s the chilling part: Even if the math is hypothetical, the lost wealth effect is real. Here’s a quote from a May 13, 2005 Wall Street Journal article by David Wessel:
A substantial body of research finds that at least 45 percent of parents’ advantage in income is passed along to their children, and perhaps as much as 60 percent. With the higher estimate, it’s not only how much money your parents have that matter—even your great-great grandfather’s wealth might give you a noticeable edge today.
Wow. Not only is good financial planning about making things better right now, it also affects tomorrows that are far beyond your own retirement. This is not to say your children are doomed by your financial missteps, nor does your good planning ensure financial success for your dependents. But the consequences of your financial decisions can be far-reaching.
Given these perspectives, no one with financial aspirations—for themselves or their future generations—has the luxury of procrastinating. The time for planning—and acting—is now. Procrastination is the stealthy killer of financial success.
By Nancy M. Ogilvie, Financial Strategist
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