Hi, my name is Tim, and I’m an avoider. Anytime I’m faced with an unfamiliar problem, or can’t quite figure out the best plan of action, my first instinct has always been to shut down and cross my fingers it’ll just go away.
Case in point: Earlier this year, I did nothing after noticing a handful of wasps flying in and out of a hole in the siding near my bedroom in May. By September, I was killing five or six a day and actually woke up to a wasp stinging my ankle.
I finally consulted a yellowjacket expert who told me it was late enough in the season to wait it out until the wasps died on their own—and hope I don’t get stung anymore meanwhile. Not ideal. Otherwise, it would cost $400 to treat and extract the nest. Had I acted earlier, the problem could have been resolved simply with a $10 can of bug spray and a $5 tube of caulk. (And I could’ve saved myself the painful stings.)
Even if you’ve never sat on a wasp infestation (and I really don’t recommend it), you’ve probably been tempted to plug your ears and avoid other problems in your life. But this tendency can have some serious consequences—especially when it comes to festering money problems like these.
Problem 1: Credit card debt
Carrying a credit card balance from month to month is an expensive habit. The average interest rate for new credit is already 16.15%—and is likely to continue increasing as the Federal Reserve raises rates over the next year. Yet Americans hold nearly $1 trillion in credit card debt with no real urgency to pay it down.
Just how bad an idea is it to ignore your debt? Let’s say you owe $8,000 on a card with a 16.15% interest rate. Making a minimum monthly payment of $160, it’ll take you seven years to wipe it out—and you’ll pay nearly $5,400 in interest. Up your monthly payment to $250, though, and you’ll pay the debt off in half the time and save more than $3,000 in interest.
Problem 2: No emergency fund
We all know it’s smart to have three to six months’ worth of basic expenses set aside for emergencies. But saving so much can be intimidating—and emergencies like layoffs or big medical bills won’t happen to gainfully employed, healthy people like us, right?
Sorry, but no. By delaying saving, you really are setting yourself up for a disaster—and to need either the generosity of loved ones or credit cards to survive. (See above for a reminder on why that’s really not ideal.) Plus, an “emergency” could be as mundane as a sudden home repair or forgotten car insurance premium. “Think of it as a ‘stability’ fund, instead of saving for some future calamity,” suggests Certified Financial Planner Kristen Euretig. When something unexpected happens, you have the cash to cover it—so your finances (and blood pressure) can remain stable.
Problem 3: Low retirement savings
The thought of not having to work anymore sounds nice and all, but the responsibility of having to save enough to cover all your post-work expenses can also feel overwhelming. Plus, given it’s so far away for many of us, it doesn’t seem like a big deal to put it off for a few years.
The sooner you start investing—even if it’s a little at a time now—the more time your money has to grow.
Let’s imagine two investors: Each invests $200 a month, gets a reasonable rate of return of 7% and plans to retire at 67. The only difference is that one starts at 25, while the other waits till age 30. By retirement, the first investor will have amassed about $593,000, while the procrastinator will have $412,000—a whopping $180,000 less.
“Even if you invest as little as 1% of your paycheck [into a 401(k) or individual retirement account], simply starting will make it easier for you to get into a habit and stick with it for the long run,” Euretig says. From there, you can regularly notch up your contributions until you’re taking full advantage of any employer match or determine you’re on track to hit the goal you ultimately set for yourself.