Financial Know-How

The "Time Value" of Money

If you took 4 dollars and put it into a long-term investment that had a 10% interest rate, you would wind up with almost $215 after 40 years. Why? Because of the Time Value of Money.

Think about all the things you’ve bought in the last week that cost you about $4: The grandé lattes, the magazines, the drinks at Thirsty Dog, and whatever else. If you cut out just one each week of these and added that money to that 4 dollar investment you would wind up with an extra $101,000 when you get ready to retire. Just by cutting out a cappuccino a week and investing that money.

If you do the math ($101,000 divided by $4) you’ll see that is 485 years worth of weekly investments, and hopefully you’ll be retiring before the year 2492, so how can the math work out?

Simple: the Time Value of money.

Thanks to the principle of Compound Interest your money can double every 7 or 8 years. Basically, over time you are not just getting interest from your money, you’re getting interest from your interest!

Take a look: Find an investment, look at the interest rate, and then divide that into 72. What you get is the number of years it will take your money to double. So if you put your money in an investment that has a 10% return, it will take just over 7 years to double.

And that is why it is so important to start investing now! If you wait until you’re 30 to start investing, you would never catch up with someone who regularly invested an equal amount starting at 25.

We just saw how $4 a week can turn into just over $100,000, imagine how much you can build if you were able to invest $10 a week, or even $25.

Say you want to have $1,000,000 when you’re getting ready to retire. If you’re 20 years old, you only need to invest around $35 a week to have a million dollars when you turn 60 years old. If you wait until you’re 30 to start investing, the number jumps to $100 a week; wait until you’re 40 and you would have to put away over $300 a week to get the same result. So at 20 years old you have almost 10 times the investment power compared to a 40 year old, thanks to The Time Value of Money.

There are plenty of options and plans for how you can find an investment that will produce similar results, and you can learn more about these opportunities on this site’s Savings & Investing Options page.