Sooner Rather Than Later

There are many old sayings that are especially relevant when it comes to your finances.

  • There is no time like the present.
  • A penny saved is a penny earned.
  • Take care of the pennies and the dollars take care of themselves.
  • You can never have enough time and money.

But perhaps one you are not familiar with is "We tend to over-estimate what we can accomplish in the short-term and under-estimate what we can accomplish in the long-term." Taking a little bit of time, deciding on a few actions to plan for the future and then carrying out those decisions can result in a more financially secure future and financial peace of mind.

Saving money on a monthly basis.

Most believe it would be wise to save more every month for retirement, funding college expenses or some other financial goal. We also know that putting off starting to do that is easy.

Just consider the difference between starting to save $300 per month at age 30 compared to age 40. Simplify the example by ignoring taxes and assume you can earn 6% on your money. If you start at 30 and continue until age 65 (420 months), you will have accumulated $427,413. If you wait until age 40 and continue to age 65 (300 months), you will only have $207,898.

What about the difference between saving $300 and $350 using the same assumptions?

Monthly savingStarting at age 30Starting at age 40
$300$427,413$207,898
$350$498,648$242,547

Notice that even if you save less, you are still much further ahead by starting earlier. Starting at age 30 and saving $300 per month is better than starting at age 40 and saving $350 per month.

Instilling a discipline.

Some of the most successful financial results are achieved with a simple formula of deciding on a wise strategy and then following it religiously. It often seems that the "following it" part can be harder than the "deciding on it" part of the formula, especially if that "following it" part is inconvenient or causes us to feel as though we are making too great of a sacrifice. Here are some ideas that can help provide that discipline.

Automatic savings plans. Let’s face it, writing a check or going to a branch every month to take money out of your checking account and deposit it into a savings account is inconvenient and the chances of missing a month or stopping completely are high. Why not just have your employer, bank or credit union handle it for you? It is free, you only have to do it once and it works.

Retirement plan contributions. By having a portion of (or a larger portion of) your wages withheld and deposited into a 401(k) or 403(b) retirement plan, you accomplish several things. You save every pay period, you pay less income tax because the contributions are not included in your taxable income and the earnings on the funds are tax deferred.

Dollar cost averaging when buying mutual funds. This simple strategy simply involves investing a constant amount in a mutual fund every month (or on some other time frame). Most mutual fund companies offer dollar cost averaging programs. Dollar cost averaging is a convenient way to consistently save. And, merely because of the mechanics, you buy more shares when the price is lower and fewer shares when the price is higher. The result is a lower average cost basis.

Value of good financial habits.

"Time is money." Compound interest – earning interest on your interest – has often been called one of the Wonders of the Financial World. The more time your money can work for you, the more productive it will be. A simple rule of thumb is that money doubles when the product of the earnings rate and the number of years equals 72. At 6%, money doubles in 12 years. At 8%, money doubles in 9 years. At 7.2%, money doubles in 10 years.

You may not be able to control how much you earn on your money, but the decision of how long you want your money to work for you – when you start – is totally up to you. Sooner is better than later.

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