Consistency Beats Intensity: Finance, Part I

If you are like most people, myself included, you have set goals and things that you want to achieve. However like most of us these goals are sometimes not realized and we wonder why. We find it hard to push through our goals and thus give up eventually.

My take on why this happens is: we do not achieve our goals because we are not consistent. Even if we work towards something, we lack the follow-through actions and eventually lose our target and motivation. After studying resources about this behavior, I came into this realization:

Consistency Beats Intensity

This is the first of a three series that discusses this concept on different aspects of our lives: our finances, health, and personal development.

Overnight success

We often hear and see in the news about people who suddenly strike it big. They sold their company for tons of money, they got millions in bonuses and income, or they won in a competition for a grand prize. These people seem to be very lucky and became what society coins as “overnight successes”.

Looking in our own lives we wonder why we are not so lucky like them. We think that success is unlikely to happen to us as they only happen to a few people, even if we feel like we deserve them. What we miss here is the story of those people before they became an “overnight success”. And if we go through their story, the term “overnight” does not make any sense at all.

More likely than not, successful people have worked very hard in their lives, doing things daily that seem like a grind, unimportant, or uneventful. These events are not newsworthy so we do not see them in television or in our social media feed. What we see are the end results of these actions and so we develop a distorted view of what success really is.

The myth of getting rich quick

One of my life goals is to achieve financial independence. I do not strive to be filthy rich, but just to have enough resources to support my family, my lifestyle and my other goals. A common goal for most of us is to achieve the same thing, or to be rich, and so we do things that take us closer to that goal.

As many people aspire to be rich, it opened up a market for some to take advantage of this fact. While many are legitimate and genuinely want to help people via books, seminars, and coaching, there are also some individuals who just want to make their money off unsuspecting people. They usually promise large profits in a short amount of time and/or you can make money without really doing anything. These offers can be very tempting as they seem to make us achieve our goals faster and easier! I find it very sad when I hear news of acquaintances and friends who fall into this trap and lose their money, some of them even older/retired professionals who lost all their savings to these con artists.

Some people opt to buy lottery tickets as their way out of poverty. This is the same concept as above: a promise of large sums of money without doing anything. The odds are stacked against you when you buy a lottery ticket and you are more likely to be struck by lightning than to win the big jackpot.

Anything worthy in life requires effort and work to attain it. If we do not work for something, it is likely that we also place less value on them.

The power of compounding

I am sure you are familiar with the concept of compound interest, and as one quote puts it:

Compound interest is man’s greatest invention.

The power of compounding in finance says that amounts that are invested over time accrue interest, and those interest earnings also earn interest over time, and so on. This results in a snowball effect that even a small amount, given sufficient amounts of time, will result in a very large sum (provided that the overall interest is positive). This concept is commonly used in personal finance to illustrate the following points:

  • Invest regularly, even at small amounts
  • Invest as early as possible

As the compound formula has a time component, it is very important that investing starts as early as possible to give the compounding enough time to take effect.

Lump sum vs cost averaging

One common debate in personal finance is the concept of lump sum investing vs cost averaging investing. Let’s say you are given ₱1,000,000 to invest. How would you go about investing it?

  • Lump sum investing – you invest the entire ₱1,000,000 at the same time
  • Cost averaging investing – you divide the sum into several parts, for example at ₱100,000 each, and then you invest each ₱100,000 every month in a span of 10 months

If we follow the compounding formula mathematically, lump sum investing should come ahead, as the entire amount was invested at the earliest time possible and so the interest earnings will be larger. Studies also show that given a sufficient time frame, lump sum investing does achieve higher returns. In reality, this is a difficult thing to do since the interest is unpredictable over time, as is the case if you are investing in equities or stocks. This is why people find it hard to invest everything in a lump sum as they are concerned that the value of their stocks will go down in the next months or so.

This is where the power of consistency comes in. If you are afraid of investing because you are not sure what will happen in the future, it may prevent you from investing in lump sum, even if it is mathematically more profitable. In this case you will need to distribute your money in a span of time so that you are more comfortable with your investment. An investment of ₱1000 is much better than ₱0 which may happen if you are paralyzed by what could happen in the future.

In the next and final part of this article, we will introduce the compounding graph and how positive and negative actions affect our finances. We will explore the darker side of compounding and how it can affect your financial future without you being aware of it. In addition, we will discuss some practical strategies on how to achieve the positive results of compounding and avoid the negative ones.

 

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