I’ve heard all the excuses before. I’ll start next month. I’ll build a plan after our vacation. There’ll be enough money once I get my tax refund / promotion / new job (and the list goes on). We can be good at making excuses… especially when it comes to our finances. The harsh reality is a lot of us deprioritize investing.
This isn’t because we don’t want to invest. Heck, we’ve probably done our research and thought about how to invest. We just haven’t put it into action. For some reason, it’s never been a priority and our investment portfolio gets the leftovers (if there are any!)
Why are we cash-strapped and waiting to invest?
I’d argue it’s because we make our lives more complicated than we have to. Luxury cars need pricey repairs. Big houses and properties need more upkeep. And “toys” and hobbies all come at a premium and take their fair share of time to maintain.
None of these are bad at all – in fact, everyone needs their version of a “release” and time to relax. For me, I enjoy quality cigars and taking my motorcycle out. One day, I’d like to get back into my pastime hobby, flying. At the end of the day, though, these shouldn’t come at the cost of your financial freedom. It’s all about balance. And today most of our culture places too much importance on today rather than the future.
Whether you know it or not, you’re always making financial tradeoffs
As we spend our money we’re making tradeoffs. Some of them are easy to recognize. For example, weighing the decision to take the family on a week-long trip or redo the backyard patio. Another example might be packing a lunch instead of dining out in hopes to save more. These are decisions we’re comfortable with and we do them all the time.
But have you ever stepped back to realize the effect of the tradeoffs you’re making to “Future You”? By spending today, instead of saving for tomorrow, you’re unconsciously making a financial trade-off.
Have you ever thought about what that decision costs you?
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It’s very costly to wait to invest
Waiting to invest is expensive. In fact, I bet it’s one of the most expensive things you’ll ever come to realize! Let’s do some simple math and compare three scenarios:
- Scenario 1: A young single male (or female) started his first job at age 25 – he decides right away to invest $250 each month. It’s a fair amount of money initially. As he grows through life though, he gets married and his own earning potential increases and it becomes very manageable.
- Scenario 2: A young couple decided to start investing together at age 35. They’ve chosen to set aside $500 each month, 2x as much as Scenario #1. Relative to both of their incomes and expenses, it’s a fair amount of money. Over time though, their forced savings is more manageable as their careers progress.
- Scenario 3: A more mature couple waited until later in life, after having kids and traveling to start investing at age 45. They focused on their careers early on, and today they take home a decent paycheck. They contribute $1,000, 2x as much as Scenario #2, and 4x as much as Scenario #1.
As you can see from the chart below, by age 65 each scenario will have earned a different amount of money:
- For Scenario 1 (25 year old single): $1.2M
- For Scenario 2 (35 year old couple): $915K
- And for Scenario 3 (45 year old couple): $668K
(Note: Assuming they can earn 9% interest per year)
Time is money! By prolonging the decision the invest, our fictitious couple in Scenario #3 has lost out on over $500,000 despite them contributing 4x as much!
SWP In Action – Thinking of “Future You” will change how you spend money
You take on a very different mindset when you think about tradeoffs that impact “Future You.” It flies against the norms of today’s culture – one that often doesn’t think beyond today. By having this mentality though, it will set you apart from a lot of people.
Why are you waiting? And what’s holding you back from taking action and starting to invest today? One of the best ways to stay on top of investing is to pay yourself first. It encourages consistent savings.
Whether you’re 25, 35 or 45, it’s never too late to start. I liken investing to a tree analogy. What’s the best time to plant a tree? 20-30 years ago. What’s the second-best time? Today.
Think it through
- How consistent are your savings? What tends to get in the way?
- How can you start saving 10% of your monthly pay?
- What three monthly expenses could you trim over the next month and reallocate to savings?
Related post: Learn how to pay yourself first and save more money
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