For those of you who haven’t had as many financial plans and projects fail as I have, I’d like to share the most critical variable in all of your goals: Time (no, not the magazine, the passing of moments). Unfortunately, time is the most vital financial variable.
Time will fix many things, but assuming you can do things quickly is usually the problem that trips up most plans and projects.
Typically a repayment plan will be quite simple:
Payment per Period = Debt / # of periods
However, there are two things wrong with this plan. First is you aren’t taking into consideration that your debt will grow with an interest rate, look up Future Value of Money on-line or look up the PMT() function in Excel to figure out what the debt is going to grow. The other major variable here is the # of periods, and that is where most plans fall over.
People are always optimistic when they start debt payback schemes (this is my opinion, but based on the observation of many friends) and think it will be easy to pay things off quickly without taking into consideration that Life, Karma, or Sh*t happens (depending on your religious point of view). If you are overly optimistic with any plan (speaking as a Project Manager now), you will fail or spend all of your time trying to catch up.
If you are much more conservative in your planning, time can be your friend. This is not to say that you should amortize your car over 10 years or your house over 50 (if you could). However, don’t get too aggressive in your plans.
Rules of Thumb
A good rule of thumb is to make up a plan initially and then walk away from it for a day. The day later look at it and ask yourself
- Can I live with this payment plan? Will this hurt a little or be agonizingly painful and make me miserable?
- What other sh*t is going to happen? (the realistic answer is “I don’t know”) Plan for bad things, and give yourself a little slack (I didn’t say let it fall on the ground, but a little slack)
- Have I tried this before and succeeded? The answer is most likely Yes and No, since you are doing it again (if you are good at building up debt and then just as good at paying it off, good on you, but why are you living on a roller coaster?).
Time passes very quickly, so plan accordingly. Time is the most crucial financial variable.
Redux
I wrote this about ten years ago, and I assure you that time is an ever-dwindling resource in your financial plan.
Financial Time FAQ
Time, it is the one variable that is uncontrollable. You cannot recover time, it simply passes. An example is when you are younger, you can absorb mistakes, but those same mistakes when you are older are catastrophic. You don’t have time to recover.
I always joke (not jokingly) that we need psychic financial planners because the element of time is the major unknown in the equation.
For anyone who’s new to finances, this should be a lightbulb moment. Time value of money is immense, it’s what makes little changes have big impacts, little interest rates turn into big sums.