The longer you are able to invest it, the more valuable $1 today becomes. That is the concept of the time value of money in a nutshell.
It makes sense. The longer you can let your money grow and compound, the more money you will have in the end. However, most people don't understand the true power behind the time value of money. Too many people believe that if they leave their money in their investments for twice as long, they will end up with twice as much money. They are wrong. They forget about compound interest.
Hopefully the example below will help illustrate the concept. In this example, we are using a starting principal balance of $10,000 and a 10 percent interest rate. In one column, we will leave the money invested for 10 years, and in the other column, we will leave the money invested for 15 years.
10 Years
15 Years
Principal
Interest $
Total Interest
Principal
Interest $
Total Interest
$10,000
$1,000
$1,000
$10,000
$1,000
$1,000
$11,000
$1,100
$2,100
$11,000
$1,100
$2,100
$12,100
$1,210
$3,310
$12,100
$1,210
$3,310
$13,310
$1,331
$4,641
$13,310
$1,331
$4,641
$14,641
$1,464
$6,105
$14,641
$1,464
$6,105
$16,105
$1,611
$7,716
$16,105
$1,611
$7,716
$17,715
$1,772
$9,488
$17,715
$1,772
$9,488
$19,487
$1,949
$11,437
$19,487
$1,949
$11,437
$21,436
$2,144
$13,581
$21,436
$2,144
$13,581
$23,579
$2,358
$15,939
$23,579
$2,358
$15,939
$25,937
$2,594
$18,533
$28,531
$2,853
$21,386
$31,384
$3,138
$24,524
$34,522
$3,452
$27,976
$37,974
$3,797
$31,773
You can see that by leaving your money invested for 15 years—only 5 years longer—you would have more than doubled ($31,773) the interest payments you would have received on your money if you had only invested it for 10 years ($15,939).
Video: Time Value of Money
Now that you've got the basics of the time value of money, check out the video below and see what else you can learn about the time value of money at the whiteboard.
Taking Your Next Step
Once you're comfortable with the time value of money, it's time to move on and learn about Tax Deferred Investing.
