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The journey is more important than the destination

Half the calendar year has already gone, and all those New Year’s resolutions to lose weight and get finances in order may have gone with it. Now the statements like “I’ve got no willpower” or “this happens every year” come out.

Take heart as the sad truth is that the human body is not wired for long-term planning. Our ancestors were hunters and gatherers who lived by the rule of fight or flight. Their dominant thoughts were purely about survival.

Fast pay off preferred

As a result, we instinctively prefer an action with a fast pay off, than one with a long-term result. The scientific name for it is hyperbolic discounting, which causes people to make choices that can lead to short term pleasure, but long-term disaster.

Credit card usage is an obvious example. Who cares about paying interest at 20% on their credit card balance, living beyond their means, or getting into financial strife when they can simply swipe their credit card and get a retail fix on the spot?

Research from Johns Hopkins University reveals that only 10% of coronary bypass patients make the necessary changes to their lifestyle to prevent further attacks. The remaining 90% still opt for the short-term pleasures of unhealthy food and no exercise.

To make it more difficult, long-term progress by its nature is slow and erratic, and is often discouraging. Imagine you got excited about investing $500 a month into a managed fund that matched the All Ordinaries Index. If the market had a great year and produced 12% compound you would have $6,341 at year’s end. The profit would be just $341. However, if the market had a bad year and went backwards by 5%, your portfolio would be worth $5,864. The difference is minimal.

The power of compound interest

This is the point where most people give up and move onto to something else with the lure of a quick high return. However, if you continued investing that $500 a month for 35 years, and the investment averaged 9% per annum, the portfolio would grow to $1.4 million.

It works the same when you are paying off a mortgage. If you owed $300,000 on your home at 5.5% with monthly repayments of $1,703, the term would be 30 years and total interest payable would be $314,000.

Suppose you learned about the effect of compound interest and decided to slash your home loan to 20 years by raising your payments to $2,064 a month, which would save over $119,000 in interest. It is a most exciting prospect, but after five long years at the higher payments, you would still owe $253,000, and may well be starting to feel the result is not worth the effort. But hang in there for another 20 years and it would be paid off. In contrast, if you leave the payments at $1,703 you would still owe $157,000 after 20 years.

Focus on understanding the process and the outcome will look after itself. This is a fundamental success principle, which is applicable in every aspect of your life. Success comes slowly, and you will almost certainly get discouraged and probably give up if you keep thinking about the outcome. It is like planting a seedling and then digging it up every year to see if it is growing.

The secret is to get excited about the process, in the certain knowledge that the right process, if followed through, will almost always lead to the outcome you are looking for.


Noel Whittaker is the author of Making Money Made Simple, and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.

July 21, 2017

Track your spending. If you don't know where your money goes, it can be difficult to find opportunities to save. Keep track of your spending habits to help identify areas where you can cut expenses.
I use Geltbox Money app ( -automatic download from any website (banks,credit cards), high level of security (Your financial data is securely stored and encrypted only in your personal computer),
When using Geltbox you don't need to give your banking account numbers and passwords to a third party.
Geltbox doesn't use any third party Aggregation site (the user can aggregate his own data without exposing private data to any third party /web site).

July 21, 2017

Like most human concepts (knife, circle, faster travel, chemicals used as medication), compound interest has been rightly hailed as a life-changing construct that can and should be used to advance goals. For those trained in the arcane world of interest (actuaries etc), compound interest is the only real bit. Simple interest artificially assumes no further growth, like a plant that will grow branches but no more.

Those pushing the compound interest barrow do us a service. While at it, we should also highlight its seemy side. Think how a credit card borrower with unpaid dues can chalk up humungous debt and potential bankruptcy, as it works as relentlessly against you.

Has the time come for a health-warning on financial products: "Beware this product contains compound interest impact"?

July 21, 2017

Noel's mortgage repayment example again reminds me of the comparison of using super contributions to pay the mortgage (or at least the accelerated repayments).
The mortgage repayment difference, in the example, of $360 per month would eventually provide about $16K in superannuation after 20 years.
If the total $16K after 20 years were diverted from super to achieve the mortgage interest reduction of $119K after 20 years, the difference in benefit is substantial - or is my elementary arithmetic lacking again.

Peter Turnbull
July 20, 2017

Noel is correct I bought Wesfarmers shares in 1992 and subsequently added to them. In addition since 1992 I have each six months taken shares instead of cash dividends. I now have quite a large holding. If I had taken cash dividends the money would have been spent probably unwisely. Peter Turnbull

July 22, 2017

Hiya Peter

Around $6 a share back then,I chose CBA rather than WES but the idea is exactjy the same,use the DRP and pick up a few more when prices fall.

At the WES AGM last year they put up a chart.People are restless , for the last 10 yrs a small decrease in WES share prices,and no increase in dividend.Questions asked etc.

Probably they were expecting this.The chart was brilliant,around 7 metres long,maybe 3 metres high projected on to the wall.

From a starting point in 1984 if $1000 was invested then by last year,all divi reinvested they were worth $300,000.The GFC looked like a bungee jump over such a long period of time and such a large chart.

I have heard them called the Australian Berkshire Hathaway.Over a 30 odd year period they may have been better than BRK and never get any credit for it.

I hope you picked up more during the GFC.From memory rights issue at around $28 (I got them),then please buy as many as you want at $14 ish,bottom of the market,WES screaming for money.I didn;t get them,I was screaming in more pain than they were then I think.

I would disagree with Noel (and everybody else) on the saving over a long period.Either share,borrow $6K and spend the next 36 yrs paying the $6K loan back.Use the DRP and then allow for a doubling of shareholding every 12 yrs approx.

The numbers go 2,4,8,000 over the 36 year period.Call it 12 yrs from 1 July this year and see what 8,000 shares in either company are worth in 2029.Adjust for share splits if they occur.

Maximum loss $6k maximum,gain ,blue sky.The good old let the money do the work.

July 20, 2017

Dylan, the article is mainly about paying of 'good' loans for an asset that is likely to appreciate in value. If you read Noel's books (making money made simple and golden rules of wealth) he would classify having a car loan, typically with higher than home mortgage interest rates, as living beyond ones means, unless the car was used to add to your wealth, for example for business purposes.

Dylan J
July 20, 2017

Fantastic reminder Noel, I am in my early 20's 3 years through a 5 year car loan. It is good to read articles reminding me to stay the course. Dylan


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