Chantal saves $1 a day for 10 years. Lorenzo saves a $1 a day for 20 years.
Q: How does Chantal end up with more money than Lorenzo?
A: The time value of money.
The Time Value of Money is what all investment programs are based on. In short, it says the length of time you let interest work its magic on your investment is more important than the amount of your investment because of something called compounding.
In our example saver Chantal invested $1 a day for 10 years starting when she was 20 and let compound interest (I’ll explain in another post) build her treasure trove for the next 40 years. Saver Lorenzo invested $1 a day for 20 years but didn’t start until he was 40. Even with compound interest after 20 years ‒ twice as long as Chantal ‒ Lorenzo’s treasure trove is still smaller than Chantal’s. Because of the Time Value of Money.
So, the takeaway here is, start saving ‒ even a little bit each month ‒ because with time it will be a lot more than a little bit. Watch Lesson 7 in Creighton Federal’s FI-Q series on personal finance.
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