January 2011 | www.selectasset.com
Financial Procrastination

It is well known that procrastination in any form can negatively impact our lives.  Financial procrastination, however, can have particularly devastating effects in both the short and long term.

  • Neglecting financial obligations

In its most general form, neglecting simple financial obligations such as paying bills in a timely manner can add up to a much more significant financial burden.  For example, a credit card bill not paid on time will incur such added fees as interest and late charges.  An unpaid or tardy utility bill may cause termination of service, at which time, in addition to those late payment charges, you may be obligated to pay a reactivation charge.  The cost of procrastination in these terms has a domino effect.

Now, let’s take a look at how similar behavior can have devastating effects on your entire life plan. 

  • Delaying financial preparations for retirement

One of the biggest issues in terms of financial procrastination is investing delays.  An oft used explanation for delaying making investments is that there are more pressing financial concerns than preparing for long term security.  However, consider this scenario. With 30 years to retirement and considering a 10% annual compounded rate of return, Investor A will have to make monthly savings contributions of $1,450 to reach his retirement goal of $3,000,000.  Investor B, however, hesitates.  Years pass, and finally, with 20 years remaining to retirement, Investor B must save $4,150 monthly to reach the same financial goal.  And how about Investor C, who waits until there are only 10 years remaining to retirement?  He now has to save $14,900 . . . monthly.  (Click here for more detailed information)

In a similar scenario, Investor A and Investor B begin investing $2,000 annually at ages 30 and 40, respectively.  Assuming a long-term average annual rate of return of 5%, by the time they turn 60, Investor A’s savings will have reached about $132,878, twice the size of Investor B’s. Of course, the fact that Investor A invested an additional $20,000 over 10 years accounts for part of the difference in the two portfolios. But a substantial part of the difference – or $26,746 – can also be attributed to the compounding effect of the $20,000 for the additional 10 years that Investor A has been investing. Another way of looking at this from Investor B’s viewpoint is that this $26,746 in incremental growth represents his "cost of procrastination" for the 10-year period that he delayed investing.

  • Putting off making major financial decisions

Another area in which financial procrastination is common is in making investment decisions.  For a plethora of reasons, including “waiting until the market improves” or trying to “time the market”, investors stand to lose thousands of dollars over the long term.  Missing the market’s best days can have a drastic effect on returns.  

Take, for example, one study that shows that $10,000 invested in the S&P 500 on January 1, 1980, would have grown to $121,029 on June 30, 2008. But if the investment missed just the 10 best-performing days for the index over this period, it would have only grown to $70,745 or about 42% lower.

Another study shows that $10,000 invested in the S&P 500 for a 30-year period from January 1, 1979 would have grown to about $244,000 by December 31, 2008, or an 11.0% annual rate of return. Missing the best 20 months over this timeframe would erode the value of the investment to approximately $42,000, or 4.9% annually. (Click here for more detailed information)

While the examples above demonstrate the costs related to hesitating to invest, putting off making other major financial decisions can be even more costly.  From buying a residential property, to saving for retirement, to making sure you are properly insured, adequate research is necessary to making sound decisions.  Procrastinating in these areas can lead to making hasty financial decisions, having insufficient time to read and analyze the fine print in contracts, and not having adequate insurance coverage or assets in times of need.  

Imagine being the 1 of 5 people who comes down with what is classified as a critical illness without being prepared with the necessary insurance.  Or, imagine the burden that will be put upon your loved ones should you pass away without having set aside the time to make proper life insurance arrangements.  Both are examples of unfortunate situations that could ultimately wipe out your entire bank balance, or leave your family in financial ruin.

In all of the above scenarios, the effects of continued financial procrastination are clear.  Select Asset Management’s experienced consultants are ready to help you get moving toward meeting your financial goals. You can’t afford to put it off any longer.