The cost of waiting one more year

Almost everyone who intends to start investing delays. The reasons are reasonable: learn a bit more first, get the emergency fund topped up, wait until after the wedding, wait for a better entry point.

The intuition underneath the delay is that a year costs you a year's contribution. If you invest $5,000 a year, waiting a year costs $5,000, maybe a little more with growth. Annoying, recoverable, not urgent.

That intuition is wrong by roughly a factor of seventeen, and this lesson is one worked example explaining why.

The worked example

Someone invests $5,000 a year for 30 years at an assumed 10%, contributing at the start of each year.

One year of delay. $5,000 less contributed. $87,247 less at the end. The skipped contribution accounts for less than 6% of the damage.

Why the arithmetic behaves like that

Here is the part people get backwards. Delaying by a year does not remove a year from the start of the plan. It removes a year from the end.

Think about what the two versions look like from the finish line. Both end on the same date. The delayed version simply has 29 compounding periods behind it instead of 30, and every single dollar in it has had one year less to grow. You did not lose the first year, which was nearly empty. You lost the last year, which was operating on a balance of more than $800,000.

Break the $87,247 apart to see it clearly. In year 30 the account grows by 10% of $817,470, which is about $81,747, and the $5,000 contribution, plus its own year of growth, adds the last $5,500. Almost all of the cost is growth that the existing balance would have produced, not the contribution itself.

Two more years, for scale

Five years of hesitation, $25,000 of contributions skipped, costs about $364,000. That is more than fourteen times the contributions involved, and nothing went wrong in this scenario. No crash, no bad fund, no mistake. The person simply started later.

What this argues, and what it does not

It does not argue that you should invest before you have an emergency fund, before high-interest debt is dealt with, or before you understand what you are buying. Those orderings exist for reasons our financial steps to freedom set out and they stand.

It argues something narrower: once those conditions are met, additional waiting is far more expensive than it feels, and the specific reasons people give for waiting do not survive contact with the number.

• "I want to learn more first." Reasonable for a month. At a year it has cost $87,247 in this example, and you will learn more from a small real position than from another twenty articles.
• "I want to start with a bigger amount." A $2,000 start that begins now beats a $10,000 start that begins in three years. The table above is the proof.
• "I'm waiting for a better entry point." The previous module dealt with this. It is timing, and it is the same decision wearing a patient face.
• "I'll start when I earn more." The lesson on lifestyle inflation (your spending rising to match every pay rise) is the answer. Earning more has historically not produced the start date, the start date produces the start date.

The one thing to take from this

If you are deciding whether to begin, begin with an amount small enough that the decision is not difficult. The amount matters much less than the date, because the amount can be raised at any time and the date cannot be moved backwards later.

Test it yourself on the growth calculator. Hold the contribution and return constant and change only the number of years from 30 to 29. The difference in the final figure is the price of one year of waiting, calculated on your own numbers rather than these ones.