October 15, 2007

time value of money

Posted in investing, money, newspaper, opinion column, spending tagged at 7:44 pm by weiszguy

This is the column I wrote for the October 17, 2007 edition of the Greenhorn Valley View.

You’ve often heard that you should save your money rather than spend it, because you’re going to need that money down the road.  You also know that when you invest money it will grow, because of the interest, dividends, or capital gains.  But did you ever wonder exactly how big your investment could get?  If you have a long period of time, and can earn a decent return, your money could grow significantly.

For example, I’m 30 years away from retirement (at least).  If I can earn 10% on my money over that time, I can turn a small amount today into a huge amount then.  I could take $10 right now and go buy a cheeseburger and a coke.  If I did, I would not just be taking $10 out of my wallet, I would be taking $174.49 away from my future self.  Now that’s an expensive cheeseburger!  You can figure out time value of money problems like this using a business calculator, or you can find several good calculators on the Internet, and if that fails, you can find a special spreadsheet on my blog that figures this out for you.

Some more examples:

Instead of spending $4 on a latte, I could have $69.80 at retirement.

Instead of spending $50 on an XBox game, I could have $872.47 at retirement.

Instead of spending $399 on a new iPhone, I could have $6962.31 at retirement.  And that doesn’t count the service plan for the iPhone.

Instead of spending $2000 on a vacation, I could have $34,898.80 at retirement.

Obviously, you won’t want to go completely spartan and never spend any money on anything.  Nevertheless, understanding how much money you’re taking away from your future self could easily sway your purchasing decisions.

I wanted to put the actual spreadsheet up here, but WordPress won’t let me upload a spreadsheet.  So here’s an image taken from the spreadsheet.  If you’d like the original spreadsheet, just email me.

timevalueofmoney

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