Last-Minute Money, The Cost of Waiting to Invest

Based on a 2018 Gallup poll, only 37% of young adults (34 and under) invest in the stock market. That's pretty alarming. It means more than half are hindering their ability to save for retirement.

By not investing early, the power of compound interest is dampened. Compound interest works like a snowball on a hill, the taller the hill (the longer the runway), the bigger it'll grow. The sooner you invest, the more money you'll have.

Many are simply stockpiling money into their bank accounts. Checking accounts typically don't pay anything. With savings accounts, you're lucky to get 1-2%.

Inflation is about 2%. Thus, with a checking account, you're losing money every year in terms of purchasing power. With a savings account, at best you break-even.

Stocks have a higher expected return, averaging ~ 7% annually (inflation-adjusted). The higher return is due to the higher risk. Stocks are more volatile, able to dramatically go up and down in the short-term. However, if you're able to think long-term, you can ignore the noise and enjoy solid returns over time.

The higher returns makes it so much easier to save for retirement. We can demonstrate this with an example.

Mark's Million Dollar Dreams

Mark is a 35 year old web designer and plans to retire at 65. He's determined that $1M is needed before he can hang up the keyboard (and tell his coworkers how he really feels).

Mark doesn't invest in stocks. He doesn't understand them and is more comfortable with his trusty old checking account.

Assuming Mark's starting from scratch. Without earning any interest on his money, he'll need to save $2083.33 a month to reach his goal. That's a lot of saving!

If Mark instead decided to invest (assuming a 7% return), his required monthly savings drops to $819.69. Big difference.

Even better, if Mark could rewind time and start investing at 25 instead of 35, he would only need to save $380.98 a month. Even a bigger difference. Starting early for the win!

That's the beauty of compound interest, the impact is not linear, it's exponential. In other words, the return isn't the same every year, the return gets bigger and bigger the more time you give it. Interest on interest is a powerful thing.

Long story short, start now! Even a little helps, get into the habit of investing regularly and build that muscle.

Check out this savings calculator to do the math for yourself.

Comments

Today's Special: Humble Pie

You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark. Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event. Be specific. Give clear examples. Vague feedback equals dismissed feedback. Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes.

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer. Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong. "You're right!" feels good. We savour the moment, analyzing every detail. "You're wrong!" stings. We want to quickly forget, dismiss, and move on. When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Herman Ye

Search