Time Value of Money


It’s so essential to really understand how just getting started can really bolster your financial growth potential. If you haven’t started saving and investing, or aren’t optimizing it today, the next best time to start is right now. No need to wait for tomorrow or when you have a certain amount saved up. Many brokerage firms will allow you to open up an account for free, have the account for free, buy and sell for free and you can start with just $10. Many will even let you purchase fractional shares.

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One of the first formulas I came across as I first learned about investing was the formula for the time value of money. Here it is:

PV; Present Value of Money (how much you start with)

i = Annual Interest Rate

n = the number of compounding periods

t = the number of years the investment will grow

Really complicated, right? On the face of it, yes. Exponents?! It’s intimidating. The bottom line of this formula is that it can tell you how much money you’ll have after a set number of periods based on an amount you start off with and a given interest rate.

Essentially, this formula tells you how much money you’ll have in the future if you invest a certain amount now. The takeaway from this formula is that the more time periods you have to let your money grow the more you’ll have; starting later means you’ll have less, even if you double up your contributions later. Below is a chart that compares two people. One of these people started investing $750 a year at age 25, 10 years earlier than the other. Even though the other person tries to catch up by putting away double the money towards investments than our early bird, you can see how things pan out for these two.

Our early bird has invested less and earned way more, and will continue to do so. Playing catchup is a losing game. Your main takeaway is that you need to start investing and growing an asset base NOW – even if it’s just $10. There’s no shame in starting small or starting older than everyone else, just start. If you’re thinking you’ll start saving and investing after you have $XXXX, you’re setting yourself back. The sooner you start, the earlier you can leverage time to grow your money.