The Importance of Financial Planning: Overcoming Inflation and Inaction
Written by David Rosbotham DipPFS | Financial Planner | Jan 25
Introduction
Financial success requires careful planning and timely action. Two of the greatest threats to achieving long-term financial goals are inflation and the failure to take action. Inflation erodes the purchasing power of your money over time, while procrastination can limit your ability to maximise returns and reach financial independence. This document explores these challenges and highlights the importance of proactive planning with a case study to illustrate the consequences of action versus inaction.
Inflation: The Silent Wealth Killer
Inflation, the gradual increase in the price of goods and services over time, diminishes the value of your money. Even modest inflation can have a profound impact on your net worth. For example, at an average annual inflation rate of 3%, CHF 1,000 today will be worth only CHF 552 in 20 years.
Why It Matters:
Erosion of Savings: Savings left uninvested in low-yield accounts may not grow fast enough to outpace inflation.
Impact on Retirement: Without a strategy to grow your wealth, the rising cost of living could jeopardise your ability to maintain your desired lifestyle in retirement.
Failure to Take Action: The Biggest Detriment to Your Plan
While inflation steadily chips away at wealth, inaction is a more immediate threat to achieving financial goals. Failing to invest or contribute to retirement accounts can result in significant lost opportunities for growth. Delays in decision-making compound the challenges posed by inflation.
Why It Happens:
Fear of Risk: Many people hesitate to invest due to market volatility.
Procrastination: Life gets busy, and financial planning is often postponed.
Lack of Knowledge: Uncertainty about where to begin or what steps to take prevents progress.
Why Taking Action Is Crucial:
Compounding Growth: Money invested earlier has more time to grow through compounding.
Tax Advantages: Early contributions to pensions or retirement accounts often offer tax benefits.
Peace of Mind: A solid plan reduces financial stress and provides a clear path to your goals.
Case Study: The Impact of Action vs. Inaction
Two individuals, John and Mary, had CHF 500,000 in savings but took very different approaches to planning for retirement.
John (Age 45): Failed to Take Action
John decided to delay his financial planning until age 55. At 55, he began investing his CHF 500,000 in general investment accounts and making pension contributions, achieving an average annual return of 7%.
At age 65, John’s portfolio had grown to approximately CHF 983,575. While this growth is significant, his 10-year delay cost him the opportunity to achieve much larger gains.
Mary (Age 45): Took Immediate Action
Mary, in contrast, started investing her CHF 500,000 at age 45, achieving the same 7% average annual return.
At age 65, Mary’s portfolio had grown to approximately CHF 1,934,842. By starting 10 years earlier, she allowed her investments to compound over 20 years, nearly doubling her wealth compared to John.
Key Takeaways
Inflation and Inaction Are Costly: Both John and Mary faced inflation, but Mary’s proactive planning significantly mitigated its impact.
Start Early: The earlier you take action, the more you benefit from compounding returns.
Seek Professional Advice: A financial adviser can help you develop a personalised plan and avoid costly mistakes.
Conclusion
Inflation and procrastination are two of the most significant barriers to achieving financial success. By recognising these challenges and taking immediate action, you can secure a more prosperous and stress-free future. Remember, the best time to start planning was yesterday—the second-best time is today.
Partnering for Financial Success
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