Photo: Mario Ortiz. Source: Wikimedia
That’s what my son’s driving instructor told him during a lesson. You can’t make up for a late start by going faster and rushing through yellow lights. And if you’re headed for a busy big city airport during rush hour, you’d better start even earlier and give yourself some margin.
The same thing holds with managing our finances. When it comes to saving, one of the most critical issues is getting started. There are only three factors that determine how much we end up with when we start saving: the amount that save, the amount of time we save it for, and the return on our savings. We are in total control over the first two of these three factors. The sooner we start setting money aside for a larger goal, the easier it is to reach that goal.
If we start saving late, we either have to save more or have a higher return. But higher returns always come with higher risk. Always. There’s no free lunch. For our money to grow, it has to go to work in the economy. If we invest in small companies in out-of-favor areas, we might earn a bundle. But we might lose a bundle, too. It’s cold comfort to know that, on average, a certain strategy works, if it doesn’t work for us. We only get one shot.
There are also a lot of technical issues that come with different investment vehicles that have to do with taxes and custody and legal concerns. And these are also important. To be honest, though, some of the disclosures that the financial industry puts out seem needlessly complex. At its heart, personal finance really comes down to amount, time and return. It really is that simple.
We can’t change the laws of physics, and we can’t change the laws of finance. Don’t ask your car to make up for a late start, and don’t ask your investments to make up for lost time. It’s just asking for trouble.
Douglas R. Tengdin, CFA