The Time You Killed

We’ve all done it. Held off on contributing more to your 401(k). Waited to refinance your mortgage to avoid the hassle. Postponed payment on that medical bill, hoping the insurance company swoops in and clears the balance magically. Procrastination can be a bad habit in your life, but downright detrimental to your personal finances. This week, I’m resuming the time value of money series to discuss how critical it is to handle major financial decisions as soon as possible.

My search for a "broken clock" yielded this. See you in my nightmares, blue eyes!

Sunk Cost

One of my favorite considerations with the time value of money is the concept of sunk cost. However, it’s one of the most misunderstood concepts. Generally speaking, sunk cost represents money spent that you can’t get back. As a result, your financial decision-making going forward should not be driven by a sunk cost. For example, let’s say you book a vacation and have to put down a 25% deposit on your accommodations. Then, your cruel boss throws an urgent project on your plate and you have to cancel the trip. The 25% deposit is a sunk cost – whether you go on the trip or not, you will not get that money back. If this is the final straw with your job, and you’re considering resigning over your boss’s shenanigans, don’t let this 25% be the deciding factor. The real decision: do I want to keep my job, or do I want to pay the remaining 75% to go on this trip? If you decide to keep your job, but are feeling passive-aggressive, you could invoice your company for the 25% deposit!

In all seriousness, misapplication of sunk cost concept really hurts people. I often hear about these poor decisions when it comes to cars. Putting money into a car is one of life’s necessary frustrations and can also turn into a money pit without thoughtful decision-making. Generally speaking, the more mileage on a car, the more repairs it will need. However, your car really doesn’t care if you just spent $800 on repairs last month – it’s no guarantee it will run another 20,000 miles without issue. I’m not going to pretend to be Click and Clack over here, but I will suggest you take a long, hard look at when it’s time to move away from an older car and invest in a newer (less used?) one.

Make Up For Lost Time?

So let’s say you’ve held off on a financial decision longer than you should have. Is it ever too late to get back on the right path? You can and should always do what you can to improve your financial circumstances, even if there is an element of sunk cost. The only exception that comes to mind is refinancing a loan – rates change, and you may lose the opportunity. But can you make up for the financial gains lost as a result of time?

Let’s get back to our pal Frank. You’ll remember from the first time value of money blog that Frank used his 1/3 stock, 1/3 bond, and 1/3 savings strategy to prepare for his retirement. He retired at the end of 2020, missing out on years of gains from the stock market. Let’s pretend we can go back in time and give Frank a few years to turn his retirement savings around.

January 1st, 2019, 11:32 AM. Frank groggily awakes from a Smirnoff Ice-induced slumber, pops a breakfast Hot Pocket in the microwave, and cracks open a can of Monster energy drink. As is his custom every new year, he decides to check in on his retirement savings. Don’t let his awful taste in food and drink fool you! Frank dreams of a house overlooking the ocean in Malibu in his retirement. He logs into his accounts to the shock that he only has two years to make up $3 million in his portfolio to afford his beachfront palace! Knowing he needs a hail mary, Frankie makes a frenzied decision to reallocate all his retirement savings into the best stock he could find. A “market analyst” (who does not disclose he owns 100,000 shares of his own) posts an article propping up the down-but-not-out retailer Macy’s. The cat claims Macy’s is due for a rebound thanks to strategic overhaul that will drive profitability and could double the value by year-end. He also heard they are stealing the Avril Lavigne clothing line from Kohl's. Franklin sets a market order to move his approximately $500,000 in savings into Macy’s stock, convinced this is his ticket to a luxurious retirement. Only problem with that plan is... well, everything. The S&P 500 returned an outstanding 30%, but his department store of choice lost about 45%! The Frankster is left with just enough money to afford a Salton Sea escape. Frank cuts his losses by selling his stock and stashing the money under a mattress. He then has to work an extra few years to make up lost ground. Ironically, the only employment he can find it holiday season work at Macy's and being a roadie for Avril's comeback tour.

The lesson here is not to put all your eggs in a dying retailer’s basket. Beyond that, though, don’t take a huge risk to make up for lost time. The stock market, or any investment, is not a get rich quick scheme or a game of roulette. It’s strategic decision to put your capital into a financial instrument to provide long-term gains. There are certainly ways to game the system and get big returns – but those investments also come with substantial risk. If you’re retired with $10 million in the stock market and live a modest lifestyle, you can take a $10,000 swing at a risky investment. But for the average person, with limited knowledge and time to research and react to market conditions, you’re much better off making the safer play. Chasing a big payoff can cost you everything.

Whatever the financial decision, time can be everything. You should not postpone key financial decisions hoping for all the stars to align. Take the steps to improve today. And not later today. Like, right now. This week’s blog is over. Have a good week! As a side note – I will not be delivering Dough-Nuts next week as I will be on a long-awaiting beach vacation! Please use this time to catch up on the blogs you missed, ask me a question, or maybe leave the house for a little bit!