Time Value of Money
The single most important concept when it comes to investing is the idea of Time Value of Money(TVM). Even more important than picking the right stocks or funds, TVM is the idea that money is more valuable today than at any given time in the future. And although this concept seems elementary, it is something that so many investors forget to properly utilize. The idea of compounding money, or “making money from money”, is so powerful over a period of time. That is why so many investment teachers are so adament for students to start investing earlier in their lives. While a teenager may not have the self-disclipline to invest their weekly allowance or money saved from a summer job, the compounding money accrued over say a 10 year period of time is astronomical. For example, Person A is 16 years old and makes a mere $2000 one summer and invests it into a portfolio of mutual funds that return 12% a year for retirement. Person B is 26 years old and invests that same $2000 at 12% a year for retirement. All else equal, the difference in retirement money at age 50 can’t be that different, right? I mean it’s only a couple years difference. At retirement at age 50, Person B will have a mere $35,122.52. Well, at retirement at age 50, Person A will have $115,917.90!!! From that same $2000 check, the power of time value of money shows us that the differences in compounding for 10 additional years is the difference between $35,000 and $116,000! Time Value of Money is truly a beautiful concept. By planning and starting early, anyone can take advantage of TVM and get the most out of their money.
Comments
Got something to say?