I just completed the first week of my online Personal & Family Financial Planning course. I downloaded the class recordings to my iPad and watched the video at my convenience. The first couple of classes touched on financial security and introduced a core finance concept – time value of money (let’s refer to it as TVOM for short).
It takes time to build anything of value. Given time, money grows in value. This fundamental truth is referred to in finance as the time value of money. Simply put, money invested grows over time through the power of compounding. Albert Einstein referred to compounding as the “eighth wonder of the world”.
As I worked through the TVOM questions on my class assignment (yea, what would school be like without those?), I thought about how this concept applies to my financial life. You see, whether we are aware of the existence of this finance concept or not, we are not shielded from its impact. Armed with my financial calculator, I calculated the total interest payment on the student loan I just paid off. Turns out I paid over $8,000 in interest – ouch! Not a bad return from the lender’s perspective. How much interest income is your outstanding debt generating for the loan providers (think mortgage companies, credit card companies, etc.)?
TVOM works just as well for the investor. Time is one of your greatest allies, whether you are saving for retirement, for a vacation or putting money aside to fund your kid’s education. The following chart illustrates how the value of a fixed monthly investment grows over time at 5% per annum. A monthly investment of $150 at 5% annual growth rate yields $59,519 in 20 years.
Time has value, monetary value. In other words, time is money. To realize the true value of time, put your money to work sooner than later and watch it grow.