The Time Value of Money

July 15, 2016
The Time Value of Money
"We must use time wisely and forever realize that the time is always ripe to do right.

- Nelson Mandela 

Investing and time

Your retirement is on sale. Right now. And at a big discount.

 

If you invest now, you will be in better shape than if you wait.  Much better. Every dollar can grow.  Sounds magical, doesn’t it?  But your money can grow, if you invest it.  Plant your dollar in a patch, tend to it and it will produce a crop of interest, dividends and growth called capital gains. Something else magical happens, the crop of one year is added to the crop that grows in the following year. So, you not only get interest, dividends and capital gains on the initial dollar, but you also gain interest, dividends and capital gains on the interest, dividends, and capital gains.  And this happens every year.  It is called compounding and it's awesome. The investment growth in any single year usually isn’t a big deal.  Over time, like several decades until you hit retirement, the impact is huge. Some examples:

  1. To have $50,000 in 40 years, you'll need to invest $7,102 today (assuming 5% growth market average is about 7%).  Yes, just $7,102 in your patch will grow to be $50,000 in 40 years at 5%. 
  2. 2. But if you wait, and want to have the same $50,000 in 30 years, you need to invest $11,569 at 5%. That’s a big difference. 

Waiting a decade means that you need to save over 60% more than if you just start now, and it doesn't take a lot to get started. Fintech companies like Betterment have a balance minimum of $0, which means you can start saving just a little bit here and there. Your retirement really is on sale now.  So start saving! 

In future posts, we will describe more on investing.  Just as you have to water and weed your garden, you have to monitor and rebalance your investments.  Also, just as picking what will grow well, producing the best harvest in your garden, while getting rid of plants that no longer grow as well, your investments need to have the right mix.

 

 

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