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Money and Time
By Gary Case

Published in the Idaho Press Tribune April 15, 2011

A few weeks back I wrote about the rule of 72, which can help calculate how long it will take to grow money given a specific rate of return. Time and money have an interesting relationship. In fact the concept of time value of money is a powerful tool that can motivate one to begin saving sooner rather than later.

A favorite illustration of time value of money involves two individuals who save the same monthly amount. However, our first individual (we’ll call her Jill) begins her process at age 20 and saves for 10 years, then stops. The second (we’ll call him Joe) begins at age 30 and saves the same amount each month as Jill, but Joe keeps saving until his age 65. We then compare account balances to see who has accumulated the most money. If we assume that both Jill and Joe save $100/month and each earns 7% compound interest on their savings, here is what this illustration shows:

Jill’s $100/month accumulates to $17,308.48 during the 10-year investment period. She is now age 30. Her account value at age 65 compounds to $199,154. Joe saves for 35 years at $100/month and has an account value of $180,105.46. Jill put in $12,000 and Joe contributed $42,000, yet Joe still has a lower account value! Full disclosure, at very low interest rates Joe will have a higher account value. Incidentally, if Jill had continued to save until age 65 her account would be worth $379,259.47!




There are three important points to be made:

1. Start early and be consistent in saving
2. Pay attention to your returns, seeking higher returns when possible and achievable
3. Know how taxes can affect your returns (see my last column-I’ll also write about this in my next column)

Finally; consider this, most people are more likely to be successful as an aggressive saver seeking moderate returns that by being a paltry saver seeking aggressive returns. Investment opportunities that seem to good to be true may in fact be exactly that. Protecting against investment losses is probably at least as important as seeking outsized gains.

Consider asking a trusted financial advisor to assist you in establishing a systematic savings plan in an amount that you can continue to fund long-term and that will earn competitive returns over the years.


Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Cornerstone Financial Planning are not affiliated.