When I was younger and had steady job as a designer I had a persistent and nagging problem that now has (thankfully) almost completely cleared up. No it wasn’t a nasty rash — this problem fell into the broad category of ‘poor planning’. I’ve always been something of a chaotic person, losing keys, forgetting passwords, appointments, directions, names of people I’ve known for years… This stuff is embarrassing, but what I am talking about is more than embarrassing — it’s expensive.
Poor planning can leach into our finances in a million different ways. The sore thumb of my twenties was dozens upon dozens of ATM fees and bank overdraft fees. It wasn’t that I didn’t have the money — this was back in the salad days of regular pay checks! It was that the money wasn’t in the right place at the right time. Perhaps it wasn’t in my checking account, and still in an unopened envelope in a pile of mail I had forgotten to deal with, or maybe it was in my checking account, but it wasn’t in my hand at 2am, when I needed to split a taxi home with a friend. How many times did I extract a twenty-dollar bill from a convenience store ATM in the middle of the night at the cost of $3! Poor planning reared its ugly head more often than not, and funds dribbled out of my accounts for the sole reason that I was constantly accessing money in the wrong way.
This behavior is what I’ve come to call ‘Bad Financial Hygiene’, and back in the day I was a particularly pungent victim of my own near-sightedness. I allowed myself to lose hundreds (was it only hundreds?) of dollars to unnecessary fees only because I was unorganized, and perhaps a little (dare I say it) lazy?
Two dollars… three dollars… and the occasional $30 overdraft fee, it didn’t seem like a lot, just the cost of being an active and cosmopolitan gal — but in reality, it was a completely avoidable tax on my own naïvety. If you look around you, there are dozens of these hidden or not-so-hidden taxes on our lazy, fearful, or thoughtless actions or inactions with our money. Banks and other organizations know the kinds of behaviors people fall into, and they capitalize (quite literally) on those bad behaviors.
The perfect example of this would be the teaser rate that credit card companies offer to new cardholders. We’re enticed by 6 months or more of interest-free credit, and perhaps even entertain the thought that “I’ll spend the next 6 months paying this card off and never have to pay another penny of interest again!” But those savvy credit card companies know us better than we do. They’re banking on the strong possibility that we’ll just continue with our minimum payments during the free introductory period, after which we’ll get stuck right back in the same high-interest soup we were in with the old card.
Yesterday I was reminded of another familiar hole I’ve jumped into a time or two by a friend who called it ‘the $35 iced tea’. She described it this way: Sometimes you get to the front of the line at a cafe with your debit card out, and as you’re passing it over to pay for your iced tea you realize you might not have the money in your account to pay for it… but you buy it anyway, and later you find out that your refreshing beverage in fact cost you $35 when you add on the overdraft charge. Ouch.
These may seem like minor crimes we commit against ourselves, but if you look at the opportunity cost of small but frequent leaks, it quickly becomes clear that we’re in fact talking about serious offenses. Because not finding money to save in our 20s costs us dearly in the future.
You probably have an intuitive understanding that the earlier you start saving the better, but you may not realize why. What is the difference between a dollar saved for 10 years, 20 years, or 30 years? If it’s invested and compounding at 8% annually, after 10 years that dollar will be worth $2.22, after 20 years it will be $4.93, and after 30 years it will be $10.94. You see that the line between these numbers is not straight, it curves up and up and up the longer you give it.
In fact, all you need to do is look at the equation for compound interest to make a case for early saving:
With time as the exponent, you can see that giving yourself more time to compound translates to exponentially more money in the end. That’s right — it’s not fuzzy, it’s math, and math doesn’t lie!
So let’s say between ages 22 and 30 I paid one $3 ATM fee every week as I was being an active, cosmopolitan gal (to be honest, it was probably much more than that). Do you want to see what that lazy leak could have contributed to my retirement had I invested those few dollars in my Roth IRA compounding annually at 8% for withdrawal at age 65:
As I evolved from a young adult to a not-quite-so-young adult I’ve figured out how expensive poor planning can be, and I’ve taken steps to plug those leaks. For me it’s been a matter of habit forming, or rather bad-habit breaking, as I’ve gradually shifted my attitude from living in the moment all the time, to having one eye on the future. It doesn’t feel hard anymore to stay out of traps, and I naturally reroute those few dollars that I save here and there to investments that are going to benefit me greatly in the future.
My challenge to you: Look at where your leaks are, and plug them as soon as possible. Then take those savings and do something meaningful with them. My favorite place to drop extra cash is my Vanguard Roth IRA, because of its low cost index funds and tax savings it’s possibly the most efficient investment vehicle on the planet!
I’d love to hear what you think about bad financial hygiene, lazy leaks, or anything else in the comments below or directly at firstname.lastname@example.org