The Value of Time In Financial Planning
They say death and taxes are the two things you can’t avoid. Well, they are wrong. There is a third thing – time. Time passes us by no matter how we try to fight it with exercise, diet and, in some cases, plastic surgery! From this description, it may sound as though time is a bad thing. It all depends on how you use it.
You can turn the passage of time to your financial benefit if you understand it. In truth, we live in a “now” world. Give me convenience or give me death! So many of us are used to getting things now, that the idea of doing something for a positive effect in ten or twenty years sounds ludicrous. Heck, most of us find it difficult to do such things even if we are talking about a benefit five years down the road. This is where you can make a major mistake in planning your financial future.
At its core, financial planning is really about time. The goal is to use dollars today in such a way as to maximize their future effect. Let’s look at a simple example.
The dream for many people is to own their own home. Millions of us clamor forth to find our first home and come up with the money for a down payment. We then apply for a loan, go through the application process and wait/pray for an answer. Most of us never even think about the term of the loan – the number of years it will be paid back over. We are just praying we get the financing and will worry about the detail later. This is a big mistake because it discounts time.
The traditional mortgage has a term of 30 years. This means you will be making that mortgage payment for 30 years or 360 months assuming you don’t sell it before then. Think about that for a minute. If you are 30 years old when you borrow the money, you will be making your final payment when you are 60! And they say people are unwilling to commit to things!
For a person that understands the importance of time in financial planning, a different approach is usually taken with a mortgage. Instead of a 30 year term, they go with a 15 year term. Since there is less time involved in the payback, each dollar of their monthly payment is converted into a greater percentage of principal, to wit, they pay much less interest over the length of the loan. Ah, but the monthly payment is more? Yes, but you can buy a lower price home, build up equity for five to seven years and then trade up for something nicer. You effectively have more money and a better home in five to seven years instead of the financial anchor of a 30 year mortgage. This is why understanding time is so important!
As hard as it may be, you should take into account time as a factor in your investing. If you can come to grips with the future benefits of action taken today, you will really be happy when those future benefits come around.