In keeping up with my financial reading I happen upon quite a few tidbits of money related perception. Sometimes these articles offer reasonable insight while other times the views appear to be a touch misguided. However, it's a rare occurrence when I read a finance related commentary only to discover that it's not especially finance related. Recently I came across an article titled "Distractions Cost Money" by David Lawrence; I claim no great originality. Yet I do believe I have something to add to the conversation.
Mr. Lawrence's article detailed 10 tips that might help one overcome these money losing distractions - focusing exclusively on the workplace. In David's words:
"Being distracted from your work can be frustrating. But it can also cost you and your firm money. Distractions can lead to delays in getting your work done and could cause you to make mistakes, disrupting an otherwise harmonious office environment."
Among his suggestions to combat these workplace distractions were thing like ignoring your cell phone, closing the door, corralling emails and other things of that nature. To be honest, I didn't actually read it that closely. (Perhaps I was distracted) Yet what struck me was that all of his proposals dwelled on the work environment. The premise of the article was something along these lines: being distracted decreases your productivity, which in turn could inhibit a solid performance review and eventually - months or years from now - you could be passed over for promotions, raises, bonuses, etc. thereby losing you money.
In other words, sure the article was about limiting office interruptions, but it wasn't necessarily about losing money directly. Much to the dismay of owners and jealous co-workers, just because someone works below their potential does not necessarily translate to lost money. In fact, some workers performing at 75% can do a much better job than others performing at 95% - it's just the way the world shakes out.
So while I agree with the underlying principle of the article's title, I think it's a roundabout way of observing the idea. There are things that we do everyday - call them disturbances, interruptions, disruptions or just life - that cost you money almost immediately. On the other hand, workplace disruptions - while very much present - may or may not lose you money. With that, I'd like to indicate three additional, and hopefully more straightforward, ways that distractions can cost you money.
I have a feeling that this distraction is less prevalent on Seeking Alpha than it is among the general population, but it's always good to review the basics. The first step towards financial satisfaction is creating a positive earnings gap between what you bring in and what you spend. After this is accomplished, you have a variety of options at your disposable. In its most basic form this means determining what you do with your savings. The options include things like a savings account, government bonds, equities or other productive assets like farms and apartment buildings.
For those on the lower end of the "risk" tolerance spectrum it might be appealing to "invest" your assets in principle guaranteed vehicles instead of the "volatile" world of business partnerships. However the true risk - as I detailed in a recent article - is not lost principle but rather loss purchasing power over time. For instance, if you allowed $100,000 to sit in a savings account that averaged say 2% in a world of 3% average inflation over a three decade period this same $100k would only be able to purchase about $75,000 worth of stuff. Your principal is guaranteed, but your risk is huge. On the other hand, if you could coax an average return of just 6% - from the likes of securities such as Johnson & Johnson (NYSE:JNJ), McDonald's (NYSE:MCD), Wal-Mart (NYSE:WMT), Procter & Gamble (NYSE:PG) and AT&T (NYSE:T) - in that same inflation environment the $100k would be able to purchase about $235,000 worth of stuff. The difference between investing in assets that have a solid chance of beating inflation and those that almost certainly do not is massive.
It seems obvious, yet people still don't invest. Life happens or concerns about stock prices next week or next month creep up. For example, an admittedly dated survey indicates that just over half of Americans have stock market investments. However, this distraction is not just limited to the binary action of investing or not investing. Even if you "plan on" investing "someday" with assets sitting idle you have fallen victim to the same distraction. If you believe that the market is a touch too high right now, or you're unsure about the FED's actions or perhaps you're even waiting for political certainty this can have tremendous effects over one's investing career. For instance, if one aggregated $10 a day and invested each year from age 20 to 65 at an 8% rate they would amass roughly $1.5 million. On the other hand, that same person that waits until age 27 - investing the same $3,650 a year until 65 at 8% - would accumulate "just" $872,000; an incredible $600k difference that results in just a $25k difference in nominal dollars and added timeframe.
Buying Unnecessary Items
The second distraction that I would like to highlight is buying unnecessary items. This ideology seems particularly relevant given that I'm writing this article on Black Friday. I don't want to get into the ethical facets of the discussion, as that's not my place. However, I would like to indicate the math behind those types of decisions: every dollar that is spent on discretionary or otherwise superfluous items is a dollar that cannot be invested - it has a double effect. Now I'm not advocating that one needs to cut down to the bare bones or skip Christmas shopping this year. Rather, I'm simply indicating that every purchase decision has a simultaneous "double-entry journal" against your available capital.
Some things like housing, eating and other basic needs are certainly more important than adding a couple of extra dollars to a brokerage account. However, other items - think anything that could be classified as "luxury" - should be weighed against the possible opportunity cost. Sometimes these added pleasures win out, other times you might realize that you could continue on without them - perhaps you would even be happier.
For instance, let's imagine that you spend an average of $5 a day on items that don't truly do that much for your everyday enjoyment. $5-a-day doesn't sound like that much, but it really adds up over time: $5-a-day equals $35-a-week, $150-a-month or $1,825-a-year. $1,825-a-year invested at 7% over 35 years equals roughly half a million dollars. So it is true that a particular $5 purchase likely isn't going to change your afternoon; but it's easy to see that half a million could. As an illustration of this point, according to this article the frugal living and already retired (in his 30's) blogger Mr. Money Mustache demonstrates that for someone currently savings 10% of their income, a bump up to just 15% could make retirement possible 8 years sooner. In the $5-a-day example, this would roughly equate to someone making $36,500 being able to retire 8 years sooner by simply readjusting a small yet reoccurring expense.
Using Stock Price As A Guide
A third distraction is allowing stock prices, rather than relative valuation or suitability, to dictate your investing rationale. I could make up an example, but Warren Buffett has covered this idea much more extensively than my hypothetical example might. Here are a few quotes on how Buffett thinks about stock prices:
"The most important investment lesson is to look at a stock as a piece of business not just something jiggles up and down"
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
"I buy a farm and I don't get a quote on it for five years and I'm happy if the farm does ok. I buy an apartment house, don't get a quote on it for five years - I'm happy if the apartment house produces the returns that I expect. But people buy a stock and they look at the price the next morning and they decide if they're doing well or not doing well. It's crazy..."
"The market is there to serve you and not to instruct you."
From this perspective an investor might become very nervous about partnering with such a business. It appears as though the company was fantastic in 1999 and 2000. On other hand, it appears downright awful for the entire passed duration of this century - reaching a high share price around $46 in 2000 and not yet recovering to that level 13 years later. Yet what is not readily apparent is that the company had exceptional returns throughout this period. Below, I have included just the earnings and dividends for ORCL over the past decade and a half:
Here we see a completely different story. Operating earnings grew by over 18% during this time period and in general the business steadily improved - increasing earnings in all but one of the last 15 years. The business of ORCL has been absolutely stunning over this time period. The problem was the way in which the company was viewed, not the underlying operating results. If we combine price and earnings, one finds a more rationale view amongst an otherwise illogical observation. Rather than viewing price increases or decreases as good or bad, one is likely better served by thinking about them in combination with sensible valuation.
Additionally, there are surely more distractions that can cost you money - this was just a sampling of supplementary ideas. The bottom line is - whether we're talking about workplace productivity, investing or even the quality of one's life - small changes can have huge impacts over the long-term. Distractions cost money.