Investing Early a Lesson on Time Value of Money one of the concepts taught by all business schools across the country is the concept of time value of money. This concept is naturally basic in spite of some difficulties of understanding. After mastering time is worthwhile is a powerful tool used to enjoy lucrative millionaires and financial freedom. Time values can be summarized in two words because they are related to investments. Start early.
The time value of money can be summarized in two words.
Suppose you have $ 100. With this $ 100 you have three options. You can spend, save or invest. Now let's see the same $ 500 from today. If you wrote it, what you bought was consumed, no more financial value, and you left 100 dollars in air. If you saved it, you would still have a $ 100 bill. The only difference is that after five years the gas has reached $ 5 per gallon, it cost $ 15 to go to the movie, and now Redbox is $ 2 per night. In other words, if you spent $ 100 today, you could buy much less than you did five years ago. Be afraid of inflation and invest in a third option before you spend your money today.
To keep this example as a base, let's say you've deposited this $ 100 into a savings account with a 5% interest. In fact, I do not know any savings deposit that pays interest of 5% today. But the concept is that we try to learn here. Like most deposit accounts, at the end of each month, you can see deposits called "interest payments" at the bank, which is the bank that pays to pay the money. 5% of $ 100 is $ 5. You will receive one-twelfth of the $ 5 you deposit each month, or $ 0.42. This is $ 100.42 until next month. The good thing about the time value of money is that you will now be interested in this new 42 cents. In our example this means an additional $ 0.02 for last month's interest.
The interest is added at an additional 25 cents per year for $ 5. I know what we say is small but all the pennies are merged. If you have a simple interest, $ 100 can earn $ 5 for five years. So at the end of five years, it will cost $ 125. In our example of a savings account, interest is earned on time-worthy money and $ 100 is $ 128.34. Investing early a lesson on time value of money make this is because the monthly balance increases with interest and the bank pays interest on interest. Many people know that it is difficult to understand that $ 100 changes to $ 128.34 instead of $ 125, and if you have trouble understanding this principle, you might want to read this article again and try to do the math on a monthly basis. See below for the first seven months.
1 month: $ 100 + $ 0.42 Interest (100 x 5% ÷ 12 months = $ 0.4167)
2 months: $ 100.42 + $ 0.42 interest (100.42 x 5% ÷ 12 months = $ 0.4184)
3 months: $ 100.84 + $ 0.42 Interest (100.84 x 5% ÷ 12 months = $ 0.4202)
4 months: $ 101.26 + $ 0.42 (101.26x5% ÷ 12 months = $ 0.4219)
5 months: $ 101.68 + $ 0.42 interest (101.68 x 5% ÷ 12 months = $ 0.4237)
6 months: $ 102.10 + $ 0.43 interest (102.10 x 5% ÷ 12 months = $ 0.4254)
Month 7: $ 102.53 + $ 0.43 (102.53x5% ÷ 12 months = $ 0.4272)
As you can see, interest on the interest amount is earned, so the monthly interest rate increases over time with the same interest rate. For example, today $ 100 can mean $ 0, $ 100, or $ 128 after five years. Let's look at $ 100 for 30 years to fully explain the philosophy of "beginning".
- Option 1: Spend. Value after 30 years $ 0
- Option 2: Save. Value after 30 years (contraction) $ 100
- Option 3: Invest. After 30 years worth $ 446.77
Now, for the sake of fun, let's say you've deposited $ 100 into your savings account every month. If everyone else is equal, see what you can get in 30 years.
- Option 1: Spend. Value after 30 years $ 0
- Option 2: Save. 30 years after value $ 36,000 ($ 100 x 12 months x 30 years)
- Option 3: Invest. Value after 30 years $ 83,672.64
Yes! If you pay $ 100 a month, the bank will pay $ 47,672,64 for your principal repayment.
