Four obstacles to financial success
by Ric Edelman ’80

s you begin trying to accumulate wealth, you’ll encounter four major obstacles. The first is the most deadly, but if you think it’s the economy or taxes, you’re wrong. Your biggest enemy is yourself. Without question, procrastination is the most common cause of financial failure.

Take the story of Jack and Jill. Let’s 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 Jack’s 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 his sister!

While Jack had invested only $16,000 to Jill’s $80,000, his money earned interest for eight years longer than his sister’s. It wasn’t the money that made him successful—it was the time value of money. Jack didn’t procrastinate. By investing sooner than Jill, his account grew larger.

Procrastination
It’s 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 today’s deadlines, you don’t have time to work on something that won’t affect you for 20 years. But that’s OK because you’re young and you’ll still have plenty of time later. Right?

Wrong! There is never an ideal time for financial planning, so don’t 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 me—who has the easier task?
A lot of people will concede the fact that starting young has its advantages. But I’m plenty young, you might be thinking, so I’ll just start next year when I’ll 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?
Don’t procrastinate. Start now.

Spending Habits
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 didn’t spend extravagantly, but they were nonetheless concerned that they couldn’t save any money.

They commuted to work separately. When they got to the office, each would buy a newspaper ($.25), coffee ($.75) and a doughnut ($1). In a midafternoon break, they’d buy a candy bar ($.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 on snacks.
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 and coffee.

Have you ever asked yourself, “Where does all the money go?” Like the Newmans, you’re probably piddling it away. You have absolutely no idea you’re doing it, because if you did, you would probably stop instantly. But we all piddle money away because we don’t 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
Inflation, the most onerous of money’s 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 million—and 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 50/50 vision.

Six percent annual inflation means $1,000 will be worth barely half that much in 10 years. In other words, you’ll 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 doesn’t even rate a mention on the evening news. We’ve grown accustomed to inflation over the past 25 years, but that doesn’t mean we don’t continue to be hurt by its effects.

Taxes
It’s 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 taxes.

Twenty-five years ago, financial planning wasn’t 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.

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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.