Lack of Planning

Planning is the key to success in anything we do.  Take Tom Brady (Quarterback for the New England Patriots), love him or hate him, everyone knows he is great at what he does.  With out practice and planning he would be just like everyone else.

Things are no different when planning for your future.  Without a budget we don’t know where or what we spend our money on or even what we have for available for saving towards tomorrow.  Planning helps us figure out what we need, when we might need it, how much it will cost, and what we need to protect as we build it.

What can lack of planning cost:

John and Rick are twins and are age 65.  Both want to retire and made $60,000 a year.  Both are married with grown up kids.  Here is where they are different.  John had a plan.  He wanted to retire at age 65 with the same paycheck he had while working.  He did his budget and found a way to set aside $400 per month towards his future.  He know has $870,000 available and wants to draw, tax free, about $3,700 per month which happens to be his current net take home.  What about Rick?  Rick boat a boat went on expensive vacations, pretty much lived paycheck to paycheck.  Just by chance he put away whatever he had left at the end of the month.  He now has $25,000.  You figure both John and Rick have a life expectancy of 87 years old so they have 22 years of retirement on average.  John spends his time golfing, playing with the grandkids and traveling and will have taken retirement paychecks of $956,000 over the rest of his life.  Rick on the other hand, lives with his son and draws $1,100 for Social Security.

Cost of not having a plan: $956,000

Procrastination

We all do this.  I can do it later or I’ll get to it after the game or after my show.  Over the years I have noticed that people are more concerned about missing their TV show than missing their appointment with their Financial Planner.  After all the future is so far away and I can always do it later.

What’s the Cost of Procrastination?

Back to our twins John and Rick.  John is able to save the $400 per month from age 25 until he is 45.  He had to stop contributing to help pay for his kids college.  At age 65 his nest egg has grown to $655,000 costing him $96,000.  He can draw a retirement paycheck of around $2,700 tax free per month for life.

Rick other hand kept putting of saving until he came to me at age 45.  We were able to find $900 per month to set aside until retirement.  Rick has $431,000 available costing him $216,000 and can take around $1,700 per month.  John gets over $1,000 more per month.

Cost of Procrastinating:   $336,000

Getting on the Wrong Side of Interest

The bottom line is what you pay for something isn’t really the total cost.  Let’s take a look at what the real cost of buying a boat is.

Let’s go back to John and Rick.  John and Rick both start out saving $400 per month.  Rick stops saving and buys a $40,000 bout at age 45.  His monthly payment is $623 for 84 months at 8% interest.  At the end of 7 years, Rick has spent a little of $52,000 for the boat, but the cost doesn’t stop there.  If Rick would have not bought the boat and put the money away in his retirement account at the end of the seven years he would have had $65,000.  So his cost of the boat would be $117,000 right?  That’s not exactly right.  Now we look what that $65,000 would be at age 65.  He would have had $143,000 more so the real cost of the boat would be $260,000.  Now that’s the wrong side of interest. 

 The point of this is not to say don’t buy a boat but rather to show the power of compounded interest.

Cost of Being on the Wrong Side of Interest:  $260,000   

The Need for Instant Gratification

In today’s world of cell phones, super speed wireless internet, and news 24 hours a day, we think everything has to come yesterday.  Reality is there is only 2 ways to accumulate money, risk and time.  Nothing long lasting comes quick.  When planning for the long term, time or the power of compounded interest out lasts high risk.