Four obstacles to financial success
you begin trying to accumulate wealth, youll encounter four
major obstacles. The first is the most deadly, but if you think
its the economy or taxes, youre wrong. Your biggest
enemy is yourself. Without question, procrastination is the most
common cause of financial failure.
Take the story of Jack and Jill. Lets say that Jack, who suffered
a head injury after a fall, decided not to go to college. Instead,
at age 18, Jack got a job, enabling him to contribute $2,000 to
his IRA each year. After eight years, he stopped, having invested
a total of $16,000.
Meanwhile, his sister Jill, inspired by Jacks accident, went
to medical school. At age 26, she began her practice and started
contributing $2,000 to her IRA. And she did so for 40 years, from
age 26 to 65. She invested a total of $80,000 and she put her money
into the same investment as her brother Jack. Thus, Jill started
investing the same year Jack stopped, and she saved for 40 years
compared to just eight years for her brother.
By age 65, whose IRA do you think was worth more money? Assuming
Jack and Jill each earned a 10 percent return, Jill accumulated
$885,185, but Jack collected $1,035,160$149,975 more than
While Jack had invested only $16,000 to Jills $80,000, his
money earned interest for eight years longer than his sisters.
It wasnt the money that made him successfulit was the
time value of money. Jack didnt procrastinate. By investing
sooner than Jill, his account grew larger.
Its easy to see why financial planning is often postponed.
After all, who has time? You have to attend that meeting, take your
kid to soccer practice and prepare for visitors this weekend. With
todays deadlines, you dont have time to work on something
that wont affect you for 20 years. But thats OK because
youre young and youll still have plenty of time later.
Wrong! There is never an ideal time for financial planning, so dont
put it off. Do it now. Procrastination will cause you financial
ruin more effectively, more completely, than the worst advice a
crooked broker could give you.
There is a specific cost to procrastination. If you are 20 years
old and you want to raise $100,000 by age 65, you need to save less
than $10 a month (ignoring taxes for the moment and assuming a 10
percent annual return). But a 50-year-old would need to to save
$239 a month to obtain that same $100,000. You tell mewho
has the easier task?
A lot of people will concede the fact that starting young has its
advantages. But Im plenty young, you might be thinking, so
Ill just start next year when Ill be making more money.
After all, what difference can one year make?
A big difference. If a 30-year-old saves $100 a month until age
65, earning 10 percent per year, the resulting account would be
worth $379,664. But if the person waited just one year, beginning
her savings at age 31 instead of 30, her account at age 65 would
be worth only $342,539. Thus, the cost of not saving $100 a month
for just one year ends up being $37,125. Can you really afford to
blow 37 grand?
Dont procrastinate. Start now.
Again, the problem is you, not the economy or world politics. To
see what I mean, look at the Newmans, married with a combined annual
income of $60,000. They felt they didnt spend extravagantly,
but they were nonetheless concerned that they couldnt save
They commuted to work separately. When they got to the office, each
would buy a newspaper ($.25), coffee ($.75) and a doughnut ($1).
In a midafternoon break, theyd buy a candy bar ($.75). Each
was spending $2.75 a day, for a total of $5.50. With 20 working
days per month, they were spending $110 per month, or $1,300 a year
And guess what happens to the money you earn before you receive
it? It gets taxed. In other words, the Newmans had to earn more
than $2,000 to net the $1,300 that they frittered away on candy
Have you ever asked yourself, Where does all the money go?
Like the Newmans, youre probably piddling it away. You have
absolutely no idea youre doing it, because if you did, you
would probably stop instantly. But we all piddle money away because
we dont pay attention. The Newmans were spending three percent
of their annual income on...nothing! Changing your spending habits
is often the key to your financial future.
Inflation, the most onerous of moneys enemies, is perhaps
the best illustration of how the rules of money have changed. Over
the past 23 years, inflation averaged 5.8 percent per year. At that
rate, a 50-year-old earning $50,000 a year, who plans to retire
at age 65 on that same income, will need a net worth of $2.2 millionand
her income in her first year of retirement will be $119,000. Indeed,
to look into the future, you need not 20/20 vision, but inflation-adjusted
Six percent annual inflation means $1,000 will be worth barely half
that much in 10 years. In other words, youll need $1,800 in
10 years to buy what $1,000 buys today.
While four percent inflation once panicked our nation during the
Nixon presidency, that same figure today doesnt even rate
a mention on the evening news. Weve grown accustomed to inflation
over the past 25 years, but that doesnt mean we dont
continue to be hurt by its effects.
Its the one we all love to hate: taxes. According to the Tax
Foundation, Tax Freedom Day is May 9, meaning that every dollar
you earn from the first day of the year until then goes to taxes.
Put another way, you work nearly three hours each workday just to
pay taxes. No wonder we find it difficult to save money.
In addition to federal income taxes, you must also contend with
state income taxes, personal property taxes, sales taxes, user taxes,
intangibles taxes, excise taxes, capital gains taxes and estate
Twenty-five years ago, financial planning wasnt as necessary.
But now, in a time of increasing life expectancy and greater financial
burdens, planning for your future is the only way to guarantee that
you will have a future.
Ric Edelman CFS, RFC, CMFC, CRC is chairman of Edelman Financial
Services Inc. and best-selling author of The New Rules of Money,
The Truth about Money and Ordinary People, Extra-ordinary
Wealth. He hosts two award-winning radio and television shows,
publishes his own newsletter, is a syndicated columnist and a highly
acclaimed speaker. He can be reached by e-mail
or by phone at 703-818-0800.