Thursday, September 7, 2017

The Dangers of "As Soon As….” Financial Planning

I recently worked with three colleagues on a research study about financial decision-making. The sample consisted of 1,538 individuals who completed an online survey during June 2016. The target audience was young adults and 69% of the sample was under age 45.We asked questions about financial decision-making related to three key financial goals: student loans, homeownership, and retirement planning.

Results of this study provided evidence of “As Soon As I…” (a.k.a., “When I…” and “After I…”) financial decision-making. In other words, many respondents appeared to be living a postponed financial life and delaying retirement savings until a certain life event occurred or another financial goal, such as repaying student loan debt or buying a home, was achieved.

By postponing savings, the wealth-building effects of compound interest cannot be maximized. For every decade that someone delays saving for a financial goal, the amount of monthly savings that is needed is 2 to 3 times higher. To accumulate $1 million at age 65, assuming a 6% average annual return, 25 year olds must invest $6,462 per year, 35 year olds $12,649 per year, 45 year olds $27,185 per year, and 55 year olds 75,868 per year.

My advice: save for later life financial goals early and often and fund multiple goals concurrently instead of consecutively. For example, reduce debt, save for a house, and fund a 401(k) together at the same time. Instead of practicing “As Soon As” financial planning, resolve to set aside money for several high priority goals at the same time. Remember…compound interest is not retroactive! You can’t earn interest on money that was not saved.

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