The time value of money is the most important concept in all of personal finance.Instead of being a “40 Year Old Virgin” like Steve Carell, your goal should be a to become a “40 Year Investor”! It is the concept that a dollar today, invested wisely and left to compound, is worth far more come retirement.
You probably already understand this concept, but if you’re rusty, or new to the game, here’s a simple demonstration:
Scenario 1: Savings Account - 40 Years of Saving
You invest $100 per month into a savings account earning 3.5% interest compounded monthly. You start when your 25 years old and you end when you turn 65. You will have about: $105,000.
Scenario 1: Savings Account - 40 Years of Saving
You invest $100 per month into a savings account earning 3.5% interest compounded monthly. You start when your 25 years old and you end when you turn 65. You will have about: $105,000.
Scenario 2: Stock Market - 20 Years of Investing
You invest $100 per month into the stock market earning a 10% average annual return per year. You start when your 25 years old, but this time you retire early when you are 45. You will only have about: $69,000.
Scenario 3: Stock Market - 40 Years of Investing
You invest $100 per month into the stock market earning a 10% average annual return per year. You start when your 25 years old and you end when you turn 65. Look at the graph below and you can see the exponential growth in the later years (sorry about the poor quality). You will have about: $531,000!
Scenario 3: Stock Market - 40 Years of Investing
You invest $100 per month into the stock market earning a 10% average annual return per year. You start when your 25 years old and you end when you turn 65. Look at the graph below and you can see the exponential growth in the later years (sorry about the poor quality). You will have about: $531,000!
What have we learned?
While the return that you are earning on your investment is clearly very important, what’s even more important is how long you let that investment grow and continue to earn a return, month after month, year after year. This compounding effect (earning a return on the previous period's return) is the key to success!
“So what about my specific scenario? When can I retire?”
Below is a very good calculator website (http://www.dinkytown.com/) that I use every once in a while. Drop in your assumptions and play away! There is even a nice graphical display of the results. Plus the site has tons of other great calculators to use in your investment planning. Remember though, the data is only as good as your assumptions...
http://www.dinkytown.net/java/Millionaire.html
While the return that you are earning on your investment is clearly very important, what’s even more important is how long you let that investment grow and continue to earn a return, month after month, year after year. This compounding effect (earning a return on the previous period's return) is the key to success!
“So what about my specific scenario? When can I retire?”
Below is a very good calculator website (http://www.dinkytown.com/) that I use every once in a while. Drop in your assumptions and play away! There is even a nice graphical display of the results. Plus the site has tons of other great calculators to use in your investment planning. Remember though, the data is only as good as your assumptions...
http://www.dinkytown.net/java/Millionaire.html
So how long will it take you to earn one million bucks (OMB!)? I'd be very interested to know when my readers hope to retire...
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