• John Krehbiel

Early Advice Yields Exponential Returns

Updated: Apr 23



Early financial advice can yield exponential returns because of compounding. Interest, both positive interest on your investments and negative interest on your loans, compounds, i.e. builds on itself, every year. A small mistake made early and repeated, grows bigger and bigger, exponentially. Therefore, getting good advice EARLY can yield exponential returns.


One of the main causes of financial mistakes I have seen is the attitude of “I’m not sure so I will just guess” or "That seems about right, let’s go with that.” In many situations, that turns out fine, and saves you lots of time. But in financial decisions it can often turn into a major mistake because of the compounding.

A few examples:

Making poor 401(k) Retirement Account selections: There are a variety of mistakes that can be made with regards to your choices for your 401(k) Retirement Plan. For example:

  • How much to contribute

  • Which funds to invest your contributions into

  • Traditional pre-tax, Roth, or Traditional after-tax?

Typically, very little guidance is offered by your employer, so people do the “that seems about right; let’s go with that.” I had a client who saw that his employer offered a choice of pre-tax Traditional 401(k), after-tax Traditional 401(k) or a Roth 401(k) for his contributions, so he did one-third into each type. Fortunately, he hired me after less than 2 years of this, so the mistake did not compound very much. We moved him into the pre-tax Traditional 401(k) only, and then an external Roth IRA. If he hadn’t sought advice, he would have been putting money into sub-optimal accounts year after year, potentially costing him tens of thousands of dollars.

Holding too much money in cash: I have had quite a few new clients who have hundreds of thousands of dollars in cash when we first meet. When I asked them why, the most common answer has been, “I wasn’t sure what to do with it.” Fortunately, they were now looking for advice. Unfortunately, the cash had usually accumulated over many years, and the lost interest and earning power was probably in the tens of thousands of dollars. If they had sought advice when they first thought, “I’m not sure what to do with this”, they would be noticeably better off. Mishandling Student Loans: Students are told that their loan payments are “deferred until you finish school.” What many don’t realize is that for most student loans THE INTEREST IS NOT DEFERRED! Although federal student loan interest doesn’t compound like normal loans, the interest still adds up (student loans are definitely are not “normal” loans, get advice!). I have one client who kept taking 1 class each semester while starting his career in order to get the loan deferment. Ten years later his interest is more than 30% of what he now owes. I wish he had sought advice early on as he was accumulating the loans.

Bottom Line:

Financial decisions are often repeated monthly or yearly, and their effects compound over time, just like compound interest. Because of this, it is beneficial to seek advice early, and not just take the, “this should be good enough” approach.

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