Cost of Delayed Investments
We often hear the quotes, “The early bird catches the worm” or “By failing to prepare, you are preparing to fail” and try our best to incorporate the true meaning of these quotes in our respective lives. The essence of these quotes tell us that one who acts first has the best chance for success and that people who fail to prepare for goals beforehand lose their way easily. Since they are not clear about their goals, they give up when they are unable to face challenges in life.
However, no one has been able to quantify these quotes. It is quite difficult to put in numbers, the cost of not being the early bird or not planning adequately for one’s future needs. Opportunity cost is one of the ways to be able to quantify the loss made due to choosing one path or option over the other.
Here we will talk about the consequences of not acting upon investment opportunities in spite of capital adequacy, being proactive instead of reactive when it comes to financial planning and the opportunity lost if one chooses to let their money sit at home instead of making it work.
Consider the story of three good friends, who in the year 1997, have just graduated and were at the cusp of beginning their careers.
- Mr. A was a very systematic person and had well-defined goals for his life. He realised early the importance of savings and how the unpredictability of future events could be insured by incorporating a very simple habit. After some research, he decided to invest in Mutual Funds through SIP’s (Systematic Investment Plans). Every month, he decided to put aside Rs. 5000 from his salary and invested it in SIPs.
- Mr. B was also wise but was not as proactive as A. In his early days he chose to spend most of the salary he earned without inculcating the habit of planning for his future goals. But upon some persuasion from A, he too started investing a similar amount but only 5 years after his friend.
- Mr. C, however, didn’t believe in the concept of investing and had a very negligent attitude towards the matter. At the time his lack of knowledge of the markets turned him against the idea of investing and preferred parking his money in physical assets such as gold or low-risk instruments such as fixed deposits. He did, however, realise that financial assets too, provide the safety of physical assets along with the added advantage of superior returns. In 2007, 10 years after A, he started putting aside a similar amount of Rs. 5000 per month as his friends.
Let’s take a look at what the power of compounding can do when applied to a hassle-free habit of investing in SIP’s
The above illustration paints a very clear picture. The general attitude of the masses who think that “it’s never too late to start” or “There is always a tomorrow” can prove very costly as it inculcates an unhealthy habit of delaying things to the future which never really comes to fruition. A simple effort made by setting aside a relatively small percentage of your regular income can help you achieve crucial goals which at the point would look almost unattainable. In this case, by starting early, Mr. A, ended up with significantly more money than both, Mr. B & C.
We are aware that the “simple” habit of investing may not be that simple and requires immense discipline on the part of the investor. This however should not deter one from realising that every path to success requires patience and as shown above, wealth accumulation is at its best in the long run as the power of compounding works its wonders on your corpus.