How Procrastination is not making you Rich

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 ProcrastinationBroadly speaking, we can classify the costs of financial procrastination in four main areas: 

1. Delays in investing
2. Putting off routine investment decisions
3. Tardiness in organizing personal finances
4. 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, Mr. Invest-First and Mr. Play-First, who begin investing $2,000 annually at ages 30 and 40 in REITs, assuming that the annual return is 5% (rather conservative). By the time they turn 60, Invest-First's portfolio would have grown to about $132,878, twice the size of Play-First as Table 1 shows.

Annual Rate of Return	5.00%	5.00%
Period (years)	30	20
Annual Investment	$2,000	$2,000
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 Invest-First 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 Invest-First has been investing. 

Another way of looking at this from Play-First'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).
#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. (Personally I am guilty of this too!)

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 time-frame would erode the value of the investment to approximately $42,000, or 4.9% annually.

Sometimes, the best way out can be the easiest way too. And that one solution would be to make periodic investments through an automatic plan (we term it as dollar-cost averaging) rather than through a lump sum to avoid missing out on days when financial markets are on a red-hot streak.

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.

One popular example, would be the tendency in delaying paying of bills and incurring late charges or interest costs. On top of these financial penalties, it may also lead to a bigger impact to one's credit profile and 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 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.
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.

Conclusion

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.

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