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Procrastination and a Jelly Donut

| March 19, 2013
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You know you shouldn’t, but you do. You procrastinate. It might be a function of too much to do, a bad behavioral habit, or simply a lack of education on what procrastination really costs.

Let’s say you pick up a bad dose of poison oak on Saturday and you are flying to the East Coast on Tuesday morning. Are you going to put off the doctor’s visit to get Prednisone foryour soon to be bubbling skin?

Not likely. Why? Because you know the cost of procrastination will be a lot of nasty discomfort.

When it comes to your money, you know you’re doing some things that aren’t very efficient, and you know that talking to a financial professional might reveal these inefficiencies. But you put it off.

Why? Because you probably think the cost of procrastination isn’t a big deal. If you thought it was, just like the poison oak, you would jump on finding a solution right away.

Let me shed some light on the cost of financial procrastination. If you pay income tax when an alternative strategy could have avoided it, it creates a cost. If you spend money that you don’t have and put it on a credit card, it creates a cost.

In these two examples, the cost is the tax and the credit card interest. But there is also a cost beyond the obvious and it is called opportunity cost. Opportunity cost is measured by the interest you could have earned on the money had you avoided losing it in the first place.

For example: A 50 year pays an extra tax or interest of a $1,000 month for a year.

In 15 years, it cost $12,000 ($1,000 x 12) plus $12,947 in opportunity costs ($12,000 x 15 years of interest at a 5% rate of return). And, at a life expectancy of 85, it cost $12,000 plus $54,192 in opportunity costs. This is an opportunity cost of almost five times the original loss!

Now, let’s say we lost $1,000 a month each and every month for 15 years. This adds up to $180,000 ($1,000 x 12 x 15), plus $91,890 in opportunity cost ($12,000 x 15 x 15 years of interest at a 5% rate of return). At age 85, the cost is $180,000 plus $541,405 in opportunity costs. This is a total cost of $271,890 in 15 years, and $721,405 at age 85.

So, if it takes a few hours to find $1,000 a month, you might not prioritize the effort because it doesn’t feel like a big deal. But, if you believed that with a few hours effort, you would be rewarded an extra quarter million dollars at retirement, and three quarters of a million dollars at life expectancy, would you procrastinate?

Not likely. Why? Because now you know the cost of financial procrastination is significant.

Why is saving money like eating a jelly doughnut?

If you save a little money or eat a jelly doughnut it’s really no big deal. But if you save a little money or eat a jelly doughnut each and every day, very soon, you become the big deal!

Author: Mark Guthrie of Westface Financial and Insurance Services

Important Disclosures:

This is written as a general information article meant to help the reader understand basic concepts in personal finance.

The 5% rate of return used in this article reflects a hypothetical investment return.

Nothing in this article should be considered a guarantee of any investment performance.

An investor should consider his or her current and anticipated investment horizon and income tax brackets when making any investment decision. This article does not reflect factors for any individual reader.

Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional or legal professional for additional guidance regarding tax and legal related matters.

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