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.
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?