The “cost of waiting” is a financial theory that aims to quantify how much money someone can potentially miss out on by waiting too long to invest or save money. In this blog, La Ferla Group will clarify the subject.
What is the Cost of Waiting?
As stated previously, the cost of waiting is a means of putting into numbers the negative effects of procrastinating, rather than investing. While it’s not possible to pin down the exact cost of waiting, it is possible to estimate certain factors that affect it.
How is it Estimated?
Monetary Accumulation
The earlier one begins storing sums of money for savings, the more money they will save up over time.
For example, saving just $300 per month for 10 years results in $36,000 in savings. Waiting five years and only saving for five years halves that number. As one earns more, they can contribute more and more to their savings.
Understanding how much money one can potentially miss out on by not making routine deposits into a savings account provides some indication of the financial damage of waiting.
Annual Percentage Yield
Annual percentage yield (APY) refers to the amount of money a bank account earns over one year, including compound interest.
Certain banks offer higher APY than others, but rates above 1 percent are generally considered to be relatively high.
Of course, the more money sitting in a savings account, the more money it will earn through interest.
Capital Gains
Money that is invested, either directly into the stock market or into a retirement account like a 401(k), has the possibility of earning capital gains. The earlier one invests, the more money they can potentially earn.
How can Waiting Affect Retirement?
Asset Allocation Implications
Waiting too long to invest can have some considerable effects on one’s asset allocation strategy.
Younger people are able to invest more aggressively, choosing high risk/high reward types of investments. This is because they have a relatively long amount of time to recover if their investments perform poorly. If their investments perform well, then they receive high capital gains.
People who wait too long to invest end up having to invest more conservatively, since they’re closer to retirement and cannot always afford to test high risk investments.
Extending Working Years
In the worst case scenario, the cost of waiting can be an extension of one’s working years. If someone simply does not have enough money to retire, working until their late 60s to early 70s may be an unfortunate reality.
While the true cost of waiting varies depending on people’s financial situations, the negative implications are clear. In general, it’s best to start saving and investing for retirement as soon as possible.
