Retirement · May 28, 2020

Why Patience Pays Off When You're Building Financial Security

There's one important quality we all need to develop and practice when we're thinking about our financial future—patience. Identifying your goals, putting a plan in place and avoiding impulse buys will go a long way toward solidifying your financial security and building the life you want.

The key to success in this effort is to have a long-term finance and investment strategy that provides a road map so you know where you're going. With this clear plan and vision in place, you may find it easier to stay the course and avoid acting on impulse.


One decision at a time

One of the reasons why sticking to future goals can be so tough is that they can feel far-off or intangible. That's why it can be helpful to start by thinking in terms of individual spending decisions. 

Often, we end up undermining our best intentions by using short-term debt to make purchases that might not fit our larger goals. Credit cards are a common example of this. It's hard to really see the impact of these purchases until after we've made them.

Consider that $10 lunch you put on your credit card when you didn't meal-prep. Depending on how much interest your credit card charges and whether you maintain a balance, you may end up paying more for the lunch than it originally cost. Over time, that interest can add up, especially if you use your card to buy food or other items multiple times per week.

While infrequent splurges on an occasional night out aren't going to make or break your financial goals, repeated use of short-term credit can create ballooning balances and negatively affect your credit score. Because your credit rating may impact how much you pay for larger purchases like a house or a car, it could cost you even more in the long run than the interest you're paying on your credit card.

How to invest for the long haul

On the flip side, positive habits can have the same kind of momentum, especially when you harness the power of compound interest. Simply put, this is interest paid on your interest. With an account that earns compound interest, your money works for you, without you having to do anything.

The key here is long-term investing. This is why longer-term CDs pay higher rates than their short-term counterparts, because of the commitment to a longer time frame. 

On a small scale, consider saving 1% of your monthly take-home pay each week and putting it into a long-term mutual fund—so if you net $3,000 per month, you'd put $30 a week into this account. Over time, the compounded interest will build on itself, because the interest you earn each year is added to the principal. That means if you put $1,680 in year one, your principal in year two is $1,680 plus whatever interest you earned last year. Now, you're earning interest on that higher principal.

You might also consider restructuring your finances on a larger scale. For example, it may be possible to refinance your mortgage and put what you save in a long-term mutual fund. 

More patience, more payoff 

When it comes to some of the biggest financial decisions you'll make, a simple waiting game can have big benefits. Buying a home, for example, can be one of the foundations of building financial security. But you may not need to rush into it—saving for a bigger down payment might actually save you money. 

Continuing to save so you have 20% of the total cost of the home to put toward a down payment may bring you two big benefits. First, when you put down 20%, you likely won't have to pay private mortgage insurance, or PMI. This expense typically costs 0.5% to 1% of the total cost of your loan annually. So if your home cost $200,000, PMI might mean you pay as much as $2,000 not just once, but each year the insurance is in effect, typically around five years. A 20% down payment may also make you eligible for a lower interest rate, which would reduce the total cost of your loan. 

When it comes to building financial security, resisting the impulse to spend for immediate gratification is an essential habit to form. Instead, you can use short-term savings accounts for emergency funds and other necessities, pay down your short-term debt like credit cards, and look to see where long-term financial thinking will pay off the most. Where possible, focus on purchases that offer a good return on your investment, and create a solid financial plan for putting as much as you can toward investments that build lasting financial security.

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