Time and Money: How to Make it Work for You

Being able to tell the time on our financial clock will help us plan for a successful future.

When we talk about financial truths, we are usually talking in the wrong time zone. That's because our normal, everyday, 24-hour clock gives us a very poor idea of the timing of the financial side of our lives. The reality is that 60 human years is only 60 minutes in financial time. So in financial terms, we are living out our lives in slow motion, and this causes us major problems by making it hard for us to see the outcome of acting or not acting in a certain way at a certain time.

In other words, one important reason why many people struggle to make good financial decisions is that the amount of time between the action and the outcome is too long for us to be conscious of the link.

If we were to fast forward our lives to retirement age and watch the whole ?movie? in, let's say one hour, we would very easily see the consequences of our decisions and actions.

On the financial clock, we would start our working life around the 15th minute and we could quickly see the consequences of everything we had and had not done up to that point. Whether we had studied hard. Whether we had made ourselves attractive to prospective employers. Whether we should have made sacrifices to gain further skills and qualifications, etc.

Around the 30th minute, we?d be climbing the career ladder earning more money, but also with more responsibilities, maybe with a young family. Will our rising lifestyle consume all our rising income, or will we manage to put some of it aside for the future?

Around the 40th minute we would witness our midlife crisis and clearly see all its causes, we might start to get anxious about our retirement, because the fast forward button lets us see that we have wasted the last 30 minutes, when we might have started to save and invest much more for the future.

Around the 50th minute, we are getting closer to retirement, and the problems caused by our failure to plan for this step earlier become strikingly apparent. To put it bluntly, if all we ever did in our working lifetime was buy a house, pay it off, educate the kids and put a bit into super, that's not enough for one lifetime. And definitely not enough to last the final 30 minutes of our lives comfortably.

"Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you."
Carl Sandburg

The financial clock is a very important financial survival mechanism for three reasons:

1. Fast forwarding helps us understand the role of time.

Thanks to the magic of compounding, or reinvesting interest or earnings, time is one of the critical ingredients in a successful investment.

Imagine you had saved $1,000 a year between the ages of 20 and 30 - less than $100 a month - in a savings account paying 8% a year, and then just left it sitting there and didn't save another cent.

By the time you were 65, that modest amount of $10,000 would have increased to more than $224,000.

Investment time frames are critical. For some people, 10 years might be a short time frame, 20 years a medium time frame, and 30 years or longer a long time frame. But remember, that's only 10, 20 or 30 minutes on the financial time clock - the time needed for compounding to do its magic.

The sooner you start thinking of your financial future, the better off you will be. On the other hand, there's no point in throwing your hands in the air if you are 50 years old and running behind time - even 10 or 15 years of disciplined investment can make a comfortable retirement more attainable.

2. Fast forwarding shows us that every day is a trade-off.

Fast forwarding is useful because it shortens the gap between cause and effect so it's easier to see what needs to be done and to muster up the motivation and will to do it.

Decisions which seem clear-cut in the present tense sometimes - but not always - look like mistakes when they are in the past. Here are three examples:

You are in the 27th financial minute of your life when you visit Paris and fall in love with the place. You go back every two years for the next four years at an average cost of $8,000 per visit. What would have happened if you?d used the $16,000 spent on repeat visits for investment purposes?

 In the 46th financial minute of your life, you and your wife decide that your promotion to General Manager, Marketing should be celebrated by selling your family home and buying a more ambitious property in a more upmarket suburb (you need to do more entertaining). So you get a bigger mortgage. Would you have been better off borrowing against the value of your existing home to purchase an investment property and rent it out?

In your 52nd minute, Great Aunt Agatha passes on and leaves you $80,000. Should you pay off the mortgage on your residence, or use the money to purchase shares in an index fund that keeps pace with the Australian All Ordinaries Index?

The right decision in each case depends on your personal assets and liabilities, your goals and your position on the clock. Is there a simple way to reach this right decision? We think so.

"The great French Marshall Lyautey once asked his gardener to plant a tree. The gardener objected that the tree was slow growing and would not reach maturity for 100 years. The Marshall replied, 'In that case, there is no time to lose; plant it this afternoon!'"
John F. Kennedy

3. Fast forwarding proves the value of a goal and a plan.

To beat the financial time clock, we have to trick our brains into fast forwarding the movie, or get help from someone who knows how to do this for us.

That someone is a financial planner who will get to know your monetary situation, goals and needs intimately. And then fast forward the investment clock to give you the best chance of reaching those goals.

Most people don't contact a financial planner until the financial clock is ticking on its last 30 minutes or so. But the truth is the sooner you rely on the professional advice of someone who is thinking in terms of 60 minutes instead of 60 years, the better your chance of retiring in comfort, if not downright wealth.

Almost all of us want to spend the last 30 minutes of our lives with our partners and our families. To experience some travel and enjoy ourselves. But to achieve that, we must spend the 45 minutes of our working lives thinking long-term instead of just living in the here and now. A financial plan gives us a way ahead and a motivation for delaying the gratification of instant spending - purely by making better decisions, and without having to give up all the pleasures and luxuries of life.

Now that you know about the financial clock that is ticking away in your life, we hope that you will keep an eye on it, and find a trusted adviser who will watch it on your behalf.

There is no point in knowing without doing. There was no point to Noah believing the rain would come if he had not built an ark. Don't be someone who just believes the rain is coming - build an ark.