Friday Financial Tidbit-The Time Value of Money

If I gave you the option, would you rather have $250,000 today or $1 million in 30 years? It’s not a trick question; some of us might go with the $1 million simply because it is more money, but with good investing and managing of that money did you know that you could more than double the million? This concept is called the time value of money.

Credit: Moneyinstructor.com

Time value of money is the value of money figuring in a period of time and interest rate. Another way to think of it is that money means more to you today than in the future. For example, $1,000 in 1922 was a lot more valuable than $1,000 is today.

Going back to our original example, suppose you invested the $250,000 for 30 years and received an annual rate of return of 10%. At the end of those 30 years you would have almost $4 million invested. If it received an annual rate of return of 8% you would have $2.4 million. If you got a 6% annual rate of return you would have $1.35 million and you would break even at 5%. So if I asked you again which one would you take, would you change your answer?

How does this relate to personal finance? The answer is that by having debt and paying the banks interest instead of paying yourself first, you are not able to take advantage of the time value of money as well as you could. It also impacts your ability to take advantage of compound interest. The fact is that your money is worth more when you have time on your side. But debt robs you of that time and leaves you with a shorter amount of time to build wealth.

So what about you? How has debt caused you not to be able to build the kind of wealth that you would like to?

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About Jon White

Giving people hope and seeing them win with their finances is something I have a strong passion for. Because of this passion I started JW’s Financial Coaching in the summer of 2010. Financial coaching has allowed me to combine my passions of finances, teaching, and helping others by helping people get on the right track financially. I'm interested in hearing your story so please do not hesitate to interact with me through social media.
This entry was posted in Debt, Friday Financial Tidbit, Investing, Money Saving Tips and tagged . Bookmark the permalink.

2 Responses to Friday Financial Tidbit-The Time Value of Money

  1. I didn’t know about compound interest until about 5 years ago. Crazy! I have several degrees, but never new how money worked until my late 20’s. I wish all that money I blew had been invested earlier in life. Yeah, student loans kept me from investing and saving for a while. Loans are gone now and compound interest is our friend.

    • Jon White says:

      Thanks for stopping by Brent. Yes, compound interest is an amazing thing especially when you have it working for you instead of having it work against you in the form of payment to the bank!

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