The Four Obstacles to Building Wealth
By Ric Edelman
As you begin trying to accumulate wealth, you’ll encounter four major obstacles.
The first obstacle is the most deadly, but if you think it’s the economy or taxes, you’re wrong. Your biggest enemy, as my colleagues at Edelman Financial Services and I can attest from having worked with thousands of people just like you, is yourself. Without question, procrastination is the most common cause of financial failure.
To understand this, consider the story of Jack and Jill. You know Jack fell down the hill, but you didn’t know that he suffered head injuries. As a result, Jack decided not to go to college. Instead, at age 18, he got a job that generated enough income for him to contribute $5,000 to his IRA each year. He stopped after eight years, having invested a total of $40,000.
Meanwhile, his sister Jill, inspired (guilt-ridden?) by Jack’s accident, went to medical school. At age 26, she began her practice and started contributing $5,000 to her IRA. And she did so for 40 years, from age 26 to 65. She invested a total of $200,000 and she put her money into the same investment as her brother Jack. Thus, Jill started investing the same year Jack stopped, and she saved for 40 years compared to just eight years for her brother.
By age 65, whose IRA account do you think was worth more money?
Assuming Jack and Jill each earned a 10% annual return1, Jill accumulated $2,212,963, but Jack collected $2,587,899 — $374,936 more than his sister! Jack had invested only $40,000 to Jill’s $200,000, but his money started growing in value eight years sooner than his sister’s. Thus, it wasn’t the fact that he saved that made him successful — it was the fact that he started saving sooner.
This is called time value of money. Jack didn’t procrastinate, and by investing sooner than Jill, his account grew larger. The time value of money is so important, in fact, that even if Jill keeps investing beyond age 65, she will still never catch Jack!
I have heard the complaint that procrastination does not belong at the top of my “Enemies of Money” list. There must be other, more serious causes for financial failure, right?
1 10% annual return is hypothetical and is for illustrative purposes only.