Investing is a fascinating thing. You start with a little bit of money and watch it change over time. Truthfully, there really isn’t any magic involved in the process. There are two important ingredients when it comes to the science of investing. What are those two ingredients? Planning and time- a little of one and a lot of the other.
Failing to Plan is Planning to Fail
People are sometimes intimidated at the thought of creating a financial plan. How can you plan for decades in the future? There are plenty of changes that happen throughout our lives; many of which we cannot anticipate. How can you create a financial plan that takes the unknown into account and prepares you for it?
While there is no one-size-fits-all financial plan, most people can create a pretty standard plan requiring only relatively minor tweaks accounting for the changes in our lives. Sure, if you’re a billionaire, live in different two countries, or some other outlier- a standard financial plan won’t work for you. But most of us are not outliers. We can agree that there is a one-size-fits-most financial plan.
When planning anything, even if you must adjust the plan, things usually go smoother than if you didn’t plan at all. Sure, sometimes not having a plan can work out great. Like the time you randomly took a day off from work and spent the day doing whatever you felt like in the moment. You saw a new exhibit at a museum, went for a walk in the park, and grabbed lunch at a restaurant that’s usually impossible to get into.
We can’t treat our finances the way we might treat a day off from work. Creating a financial plan isn’t terribly complex and it sets us up for the future. Having a financial plan allows us to pursue our financial goals and even our non-financial ones. This is so important that I’ve written a book to show you step-by-step how to get it done! The book will be out in a few weeks. I’m very excited about it.
Some Things Can’t Be Rushed
Once you have your financial plan in place, the next critical ingredient is time. There is no substitute for it and no way to accelerate its effect. In the last few decades, we’ve gotten used to immediate gratification.
It doesn’t take nine months to watch a whole season of a TV show. You can hammer it out in less than a day on Netflix. You don’t have to wait for a whole pot of coffee to brew in order to have one cup. You can put in a Keurig pod and have a cup ready in seconds. When I was a kid, my family made many meals in our slow cooker. It took a few hours to get dinner on the table; but the meals were always tender, flavorful, and delicious. Now many people do most of their cooking in a microwave. A microwave is obviously faster than a slow cooker; but microwaved food often has a rubbery texture and strange temperature mix.
Investing doesn’t give us a choice between a microwave and a slow cooker. The only option that exists is the slow cooker. The sooner you put the food (money) into the cooker, the better. Take a look:
- $5,000 initial investment
- $1,000 monthly contribution
- 30 years invested
- 7% annual return
- End result: $1,171,590.71
- $10,000 initial contribution
- $2,000 monthly contribution
- 15 years invested
- 7% annual return
- End result: $630,686.84
In the end, Person A invested $5,000 less than Person B but ended up with over half a million dollars more simply because Person A had their money invested for twice as long.
You Don’t Need a Magician
There is no workaround. There is no way to game the system. There is no microwave. Planning and time are essential to investing. Also throw in a little help from a trusted Certified Financial Planner™!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
The hypothetical example provided is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.