B Comes Before C
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By Ben Dolan
The late Charlie Munger, business partner to Warren Buffet and an investment icon, was well known for his multi-disciplinary worldview. He studied mathematics, physics, philosophy, and more, often on his own and out of sheer curiosity, looking for ways to apply what he learned to his daily life. While certainly a polymath, the highly quotable Munger was never esoteric. One of my favorite Munger quotes, in the realm of investing, is simple: “The first rule of compounding: Never interrupt it unnecessarily.”
Compound interest truly is the eighth wonder of the world, but many are not heeding Munger’s advice. In a March 11 article in the Wall Street Journal, Anne Tergesen points out that many Americans are using their 401(k) more like and ATM machine than a long-term investment vehicle.
Using data from large 401(k) provider Vangaurd, Tergesen states that currently 13% of participants have an outstanding 401(k) loan. Some of this may be due to a quick cash need and is paid back with little interruption to investing, but I suspect that may not be the case for most borrowers. And not paying back a 401(k) loan can be costly, resulting in “income tax on the loan and a 10% penalty on the unpaid balance.”
I suspect the real culprit is poor budgeting. Many do not take the time and diligence required to effectively budget so that they understand not only where their money is coming from and spent, but where it will go in the future (forecasting future expenses). When done properly, and along with an appropriate emergency fund that is not part of long-term investing, you can let compounding run wild. Or, as one of my favorite bands, The Grateful Dead put it: “Let it grow, let it grow, greatly yield.”
For budgeting tips and tricks, check out my post here.
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