As long-time procrastinators will attest, this deferral of something that needs to be done is rarely an isolated instance, and it usually occurs habitually and for trivial reasons.
Procrastination can have a number of undesirable consequences, such as missed deadlines, wasted opportunities and sub-standard work as a result of insufficient time. The costs of procrastination, while substantial, are not easy to quantify.
But what can be quantified – at least to some extent – are the costs associated with putting off decisions and actions when it comes to personal finances and investments. Beware of such "financial procrastination," because the price tag of needless delay in this crucial area can be steep.
Five Costs of Financial Procrastination
Broadly speaking, we can classify the costs of financial procrastination in five main areas:
- Delays in investing
- Putting off routine investment decisions
- Tardiness in organizing personal finances
- Late filing of taxes
- Procrastinating on major financial decisions
1. Investing Delays
Delays in putting your money to work through investments can eventually end up costing you a lot. Consider the case of two hypothetical investors, Ms. A. Lacrity and Mr. D. Lay, who begin investing $2,000 annually at ages 30 and 40 respectively in a tax-deferred account such as an individual retirement account (IRA). Let's assume that the long-term average annual rate of return earned by both investors on their investments is 5%. By the time they turn 60, A. Lacrity's IRA would have grown to about $132,878, twice the size of D. Lay's IRA, as Table 1 shows.
|Annual Rate of Return||5.00%||5.00%|
|Total Investment (I)||$60,000||$40,000|
|Total Value (V)||$132,878||$66,132|
|Growth (V – I)||$72,878||$26,132|
|Cost Of Procrastination||$26,746|
Of course, the fact that A. Lacrity invested an additional $20,000 over 10 years accounts for part of the difference in the two portfolios. But a substantial part of the difference – or $26,746 – can also be attributed to the compounding effect of the $20,000 for the additional 10 years that A. Lacrity has been investing. Another way of looking at this from D. Lay's viewpoint is that this $26,746 in incremental growth represents his "cost of procrastination" for the 10-year period (recall that he commenced investing at age 40, rather than at 30). (Learn more in Accelerating Returns With Continuous Compounding.)
Two points need to be noted here:
- The higher the rate of return, the higher the cost of procrastination – According to Ibbotson Associates, the compound annualized return for the S&P 500 for the 30-year period from July 1979 to July 2009 was 10.75%; for the 20-year period from July 1989 to July 2009, it was 7.76%. Long-term government bonds returned 9.46% annually for the 30-year period beginning July 1979, and 8.55% for the 20-year period commencing July 1989.
- If we therefore assume an 8% annual rate of return in the previous example instead of 5%, the cost of procrastination rises dramatically. As can be seen in Table 2, this cost increases to over $95,000.
|Annual Rate of Return||8.00%||8.00%|
|Cost of Procrastination||$95,042|
2. Putting Off Investment Decisions
Putting off investment decisions until the market "improves," or consciously delaying investing in a bid to "time the market," can also cost thousands of dollars over the long term. Many professionals view market timing as an exercise in futility, primarily because missing the market's best days can erode returns significantly.
One study shows that $10,000 invested in the S&P 500 on January 1, 1980, would have grown to $121,029 on June 30, 2008. But if the investment missed just the 10 best-performing days for the index over this period, it would have only grown to $70,745 or about 42% lower.
Another study shows that $10,000 invested in the S&P 500 for a 30-year period from January 1, 1979 would have grown to about $229,000 by December 31, 2008, or an 11.0% annual rate of return. Missing the best 20 months over this timeframe would erode the value of the investment to approximately $42,000, or 4.9% annually.
An investor who invested $100,000 in the S&P 500 at the beginning of March 2009 would have obtained total returns (including dividends) of 51% by mid-November of that year. Had that investor procrastinated for a couple of months and invested at the beginning of May, total returns by mid-November 2009 would have shrunk by half, to about 26%. The cost of procrastination in this case would be 25%, or $25,000 on a $100,000 portfolio.
The best way to avoid missing out on days when financial markets are on a red-hot streak is to ensure that you stay fully invested in it. In case you are concerned about investing "at the top," one solution would be to make periodic investments through an automatic plan rather than through a lump sum. (To learn more, read Dollar Cost Averaging Pays.)
3. Tardiness in Organizing Personal Finances
Getting your financial house in order is a vital area that may tend to get overlooked in the hustle and bustle of daily life. In some cases, this tardiness may have a direct opportunity cost - for example, a $50 gift card that you delayed using for two or three years until it was well past expiry. In other cases, procrastination may have a relatively minor effect at first, but may have a cascading impact that gets magnified over time.
For example, tardiness in depositing checks may lead to an overdrawn account, while putting off paying bills may lead to missed due dates. While financial penalties in the form of overdraft fees, late charges and interest costs are an inevitable consequence of such procrastination, the bigger impact may arise from negative revisions to one's credit profile and credit score. (For more, check out 5 Keys To Unlocking A Better Credit Score.)
A couple of minor bills that you never got around to paying can eventually end up as a red flag on your credit report. Lenders who view your credit report may then view you as a higher-risk borrower, and charge you a higher interest rate to compensate for this perceived greater risk. This can result in thousands of dollars in higher interest costs for big-ticket items such as a house or a car, a steep price to pay for procrastinating on a couple of bill payments.
4. Late Filing of Taxes
Since the tendency to procrastinate is directly proportional to the unpleasantness of the task, it is not surprising to note the large number of people who miss the deadline for filing their tax returns every year. By that token, April 15 must probably rank as one of the most dreaded dates for procrastinators in the U.S. But it makes sense to file taxes by the due date, because penalties and interest can make late filing an expensive proposition.
The IRS charges a monthly penalty of 5% of the tax payable for failure to file income tax returns by their due date, up to a maximum penalty of 25%. So if you were unable to get your paperwork together in time to meet the tax filing deadline, and ended up filing six months late with a tax balance payable of $5,000, your failure-to-file penalty (excluding interest) would be $1,250. Your total cost of procrastination in this case would be $1,250 plus any interest or other penalties assessed by the IRS. That should be sufficient inducement to avoid procrastinating on your taxes in future years. (For more, check out Next Season, File Taxes On Your Own.)
5. Procrastinating on Major Financial Decisions
While the preceding cases can cost in the thousands, procrastinating on major financial decisions can ultimately cost you the most.
For most people, the necessity to make major financial decisions – the ones that involve relatively large sums of money – tends to coincide with personal milestones such as buying a residential property or saving up for retirement. It is highly advisable in such cases to begin learning at the earliest opportunity about the finer details of the upcoming financial milestone and the factors that need to be considered in making a decision concerning it. As an example, when buying a residential property, the prospective buyer needs to evaluate numerous factors, including: the mortgage amount that can be comfortably serviced, arranging for the down payment, deciding on whether to opt for a fixed-rate or adjustable-rate mortgage, deciding how much to bid for a desirable property etc. (To learn more, see Get Personal With Your Portfolio.)
Procrastinating on major financial decisions may lead to a number of pitfalls such as:
- Making hasty decisions without adequate research
- Having insufficient time to read and analyze the "fine print" in contracts
- Not having adequate insurance coverage or assets in times of need
Buying an overpriced condo without assessing its investment merits; being unaware that one's adjustable-rate mortgage will reset to an interest rate that is twice the teaser rate; being struck down with a debilitating illness when one does not have long-term disability insurance. These are all examples of unfortunate financial situations that can wipe out a massive chunk of one's bank balance and net worth. However, doing one's homework and taking prompt action can help avert or at least mitigate these losses. (For more, see Are You Living Too Close To The Edge?)
Time is indeed money when decisions have to be made and actions taken with regard to your personal finances and investments. In this regard, prompt action needs to replace financial procrastination, since the costs associated with the latter can be very steep.