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A Little Financial Pain Can Yield Big Gains

Sept. 26, 2014
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By Adam Harding

Learn more about Adam on NerdWallet’s Ask an Advisor

Few activities make me think “What am I doing with my life?” and “I might throw up” at the same time like burpees. (For those of you who don’t know what a burpee is, you can see one here.) Burpees, amongst other boot-camp style workouts, are a regular part of the regimen at my local gym.

After a recent tough workout, I started thinking about how investing and financial planning is just like doing burpees: tough while you’re doing them but pay off in the long run.

Pain today turns into strength tomorrow.

In financial planning, struggling today will often lead to benefits tomorrow. As an investment advisor, I have seen many families who have had to persevere through financial hardships by building prudent spending and savings habits.  As those same families emerged from the tough times, their habits remained intact and helped their wealth grow. I’ve found that some of the most financially sound individuals and families are those who practice a sense of false deprivation that keeps them from living beyond, or even up to, their means. Perhaps my favorite book on this subject is Thomas Stanley’s “The Millionaire Next Door.” I recommend this book to anyone looking to build habits that may lead to financial independence and significant wealth.

On the other side of the coin, in families where significant wealth has been created, the heirs to such wealth grow up unprepared to manage significant wealth — their financial “muscles” are weak or untrained. In this case, education must take the place of experience. Successful families should consider sending their children and grandchildren to a financial “boot camp.” Your advisor should have information about educational programs for heirs.

Delayed gratification is everything.

This time of year I typically reserve my weekend mornings for a trip to Dunkin Donuts followed by some final adjustments to my fantasy football lineup. But getting in a workout beforehand makes the rest of the day that much better. If I can simply tell myself that I don’t deserve the momentary bliss that comes from eating frosting-covered fried food for breakfast, then I’ll be much happier in the long run with how I look and feel. Financial planning and investing is about making many seemingly small choices that, when combined, make a huge difference in your long-term financial well-being.

The decision to defer gratification can be made at various stages in our financial life and to various degrees, but the potential reward for doing so varies greatly.

Consider a hypothetical investor who chose buying shares of Starbucks instead of a daily latte. Rather than research the historical price of a latte over the last 20 years, let’s simply consider a $100 investment made in Starbucks (symbol: SBUX) on January 1, 1994. If held for 20 years, on January 1, 2014, that initial $100 investment would be worth nearly $6,000, a return of over 5,800%!  This is certainly is not a recommendation to buy Starbucks stock, but rather an illustration of the power of deferring gratification. Is buying a caffeine buzz in 1994 worth the same as a Rolex in 2014?

An investment in a poor company may have resulted in a total loss of principal over this same period. Investing involves risk, so be sure to consult your financial advisor before making investment decisions.

Perhaps an example closer to home would be deciding when to draw on Social Security benefits. There are several factors to consider, but all else equal, delaying receiving Social Security benefits can result in an 8% increase in the benefit amount for each year benefits are deferred, up to age 70. In today’s markets, an 8% percent return backed by the U.S. government would seem like an opportunity that is far too good to pass up, yet many continue to do so. Again, certain conditions may suggest that an earlier draw on Social Security is the right move, so be sure to consult your financial advisor before making this decision.

A little discomfort can be a good thing.

Some of you may recall Warren Buffett’s famous quote: “Be fearful when others are greedy and greedy when others are fearful.” Much success in investing can come not from being a genius but rather by doing the “average” thing while everyone around you is going nuts. The truth of the matter is that many investors understand that they must be disciplined, but many fail to be so when fear takes over. Thus, if you can become OK with a little discomfort in the markets, or in the gym, then you can make rational decisions that should have a positive long-term effect on your financial and physical well-being.

As is the case with most things that offer the potential for great reward, implementing these ideas should not come easily. In fact, some of these suggestions will directly conflict with your innate desire to do just the opposite. Making these decisions may be painful, difficult, or uncomfortable today, but they will pay off exponentially later on in life. The first step is having a plan.