Investing is all about compounding over time; if you put in x amount today what will get you get tomorrow. This concept is extremely important to investors. In fact, first thing you learn in Finance 101 is the time value of money. The formula is as follows:
Future Value = Present Invested Amount * (1+Interest Rate )^Time
The most important valuable factor in this equation is time. So if you start saving sooner rather than later, you will have more time to let your money compound.
Here is an example. Guy A starts saving when he is 20. While the Guy B starts saving when he is 30. Both guys will retire at the age of 60 and will invest $10,000 at the same interest rate-5%.
Guy A: FV = 10,000 * (1+.05)^40
Guy B: FV = 10,000 * (1+.05)^30
FV = 43,219
The only difference between the two guys is that B started 10 years later. You might have thought what difference does 10 years make? Well, a lot actually – a $27,180 difference.
What is the moral of this story? Start investing while you are young, because time is by your side. And by the time you retire, you would not need to use any ambitious investing strategies to fund your retirement. Think about it, the only way Guy B can catch up with Guy A, is either by adding more money or getting a higher interest rate. And Guy B can only increase his interest rate by taking on more risk, which may lead to an earlier death- AKA heart attack!
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Tags: finance 101, future value of money, FV equation, investing 101, investing explained, investing while you are young, investing young, present value of money, PV equation, time value of money, value of money