If you ever heard the song, “Time Is on My Side,” consider it your financial anthem. You have more time than the rest of the population to acquire wealth. Do you know why?
Time and Money Quiz
1. Money loses its value over time if it’s not invested. Why?
2. Investments tend to snowball over time. Why?
3. “Time is money?” Why?
4. Longer-term investments pay more interest. Why?
5. Why do women need to save more and for longer than men?
Answers: 1. inflation 2. compound interest 3. lost time is a lost opportunity to make money by earning/investing 4. again, lost opportunity to do other things with your money 5. on average they earn less and live longer
If you can go without your money for a time someone else will pay you to use it (interest). The longer you give up access, the more compensation you can expect. That’s why a 10-year Treasury savings bond usually pays much more than a three-month CD (certificate of deposit).
The other big point about interest is that it compounds so even small sums invested snowball over time—typically.
There’s the risk with some investments that you end up worse off than you started. If your return is guaranteed, your interest rate is lower than if you take a risk. Read “Risk & Return” for more. (Ed. Note: link.)
Want to Be A Millionaire? Start Early:
$25 a month invested at 6% interest for 10 years = $164,699
$25 a month invested at 6% interest for 30 years = $1,009,538
Compound Interest, Capiche?
Very simplistically, say you’re getting 10% on $1,000 in year one, you’ll start year two getting 10% on $1,100—your original investment (aka “principle) plus what you earned in interest the first year. That doesn’t sound very dramatic, but to grasp the magnitude of compound interest, watch this video (St. Louis http://t.co/0uBfUIfR) and see the examples below.
“Strange But True”
- You could earn more in a job that pays a penny a day and then doubles your pay every day for 35 days than you could in a job that pays a steady $1,000 a day over the 35 days. See this stunning example of compound interest in action from CashCourse, an online educational platform from the National Endowment for Financial Education (NEFE).
- Someone who starts saving at age 20 and stops after 15 years will end up with more in retirement than someone who waits till age 40 to start saving the same way and keeps saving for 25 years.