Time Value of Money

Here’s a Little F M for You. Oh, That’s Financial Magic, Not . . .

Tom Kjar

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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What’s the Difference Between Compound Interest and a Compound Fracture?

Tom Kjar

That’s a dumb question but it got your attention.

Compound interest has been around a while. It is thought to have originated in 17th century Italy. Think of compound interest as interest paid on interest. In other words, interest calculated on the amount of money you save or invest along with all of the interest you previously earned. Compound interest will make money grow at a faster rate than simple interest, which is calculated only on the amount invested or saved.

Where things really get “interesting” (lame pun intended) is when you let your investment grow for a long time. Check out the example below.

Starting at age 25 Susan invests $50,000 over 10 years and ends up with more money at retirement than Bill who started 10 years later and invested 3X as much over 30 years. How’s that possible? Compound interest.

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