Unlocking the Magic of Compounding: Why 'Later' is Your Biggest Enemy
One word can change the course of your financial history — “later.”
That single word can doom even the most well-intended personal finance goals. I’ve talked to very rich people, and I’ve spoken with poor people, and without a doubt, the number one regret most people have when it comes to financing is waiting until “later.”
I’m “busy.” You’re “busy.” We’re all “busy. I’m trying to remember the last time I asked someone how they’ve been, and they didn’t say “busy.” I’ve written about performative busyness on my personal blog, so I’ll leave that soapbox-worthy speech there. Busyness has become a crutch — an excuse to putting off things that might be mildly unpleasant, difficult, or stress-inducing. Unfortunately, the busy crutch doesn’t help heal anything; it only delays and worsens the pain.
Most things worth doing have some element of discomfort or difficulty. Whether eating healthy, getting enough sleep, or saving for the future, we’re incentivized to delay actions that will ultimately help us. If life operated linearly, delaying wouldn't be so bad. But most things in life compound, meaning minor setbacks today can be major ones 20 years from now.
The difference between starting to save for retirement in your mid-20s versus your mid-30s may not seem like a big deal — but it is. Consider this: 9% earnings for 20 years isn’t 80% like simple arithmetic might suggest; it’s 460%. Why? Compounding.
Compounding has been called the 8th wonder of the world. It’s the closest thing to magic I’ve ever seen. The most crucial element to unlocking the magical power of compounding is time. In his book, The Psychology of Money, Morgan Housel explained time's vital role in Warren Buffet’s success. He pointed out that “$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday.”
Housel goes on to explain:
“Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real reason for his success is that he’s been a phenomenal investor for three-quarters of a century.”
I don’t mean to diminish the spectacular career Buffett has had. His consistency and steadfastness are unrivaled. I only mean to applaud his ability to recognize the force of compounding and invest in a way that unlocks its potential.
I’m not Warren Buffett, and neither are you, but we both have access to compounding. If you’re already crafting excuses for why you can't think about personal finances today, let me address some of the common ones I hear.
I’ll get to it later, when I have more money — some people believe that financial planning and investing are only for the rich. This is untrue, but this belief will also almost assuredly keep you poor. Whether you’re just entering the workforce, trying to recover from a financial setback, or well on your way, financial planning is for you. It’s about much more than money; it’s about aligning your money with your values and dreams.
I’ll do it later, when I have more time — there’s never more than 24 hours in a day, and there’s never a perfect time to prioritize your financial wellbeing. It doesn't take much time to take actions that have significant long-term benefits. Further, some actions can actually save you time, like setting up automated bill payments and retirement contributions. If it’s important to you, you’ll find the time.
I’ll do it later after I get a bit more organized — when I hear this one, I ask, “when will you get more organized?” The answer is almost always “when I have more time.” A two-for-one excuse! If you are unorganized, you need to ask yourself why. If the answer is lack of time, you should ask why again. You may discover that these problems are interrelated, and getting organized will create order and beauty that will have positive secondary and tertiary effects in multiple areas of your life.
Later is dangerous, especially when it comes to personal finances. It leads to regret, missed opportunities, unachieved goals, and stress. Don’t put those burdens on your future self.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
