Tuesday, 20 September 2011

The Time Power of Money

This lesson demonstrates how time affects the growth of your money. In other words, the sooner you start, the richer you will become. A dollar today is worth far more than a dollar in 40 years - as long as you don't spend the $1,000 before then!

Ok, brace yourself...here goes. Lets say you turned 18 today and placed $1,000 in the bank this afternoon. This becomes your habit each birthday until you turned 25. You have now saved $8,000.

As you can see above, your $8,000 has compounded into $12,579 at a rate of 10%.  Read this if you would like an explanation on compound interest.
Now lets say your twin sibling saw your $8,000 investment turn into $12,579 and decided to take over your habit on their 26th birthday saving $1,000 each year for 40 years until they turn 65. They have now invested $40,000 while your $12,579 kept growing at the same 10% rate. 

Now, before you scroll to the bottom of the next schedule, who do you think has more money at age 65?

As shown in the spreadsheet, you would have $569,338 while your twin sibling would only have $486,852. What you see happening here is the time power of money. $8,000 over 47 years has a slightly higher value than $40,000 had over 40 years. That means each dollar of yours was really worth $71, while each dollar of your siblings was worth only $12. 

This principle shows the urgency in starting your savings today. Every year you wait, each dollar you earn has less and less value the day you retire.

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