One of the fundamental principles of finance is the concept that $1 today is more valuable than $1 a year from now.
Making adjustments for inflation, the dollar will buy less goods and services next year.
But I can invest that dollar today and earn a ROI (Return On Investment) in the form of dividends, interest or capital gains.
The best money advice anyone can ever give you is to firmly establish this time value of money concept in your head.
The key to financial prosperity is realizing the potential value of every dollar that comes into your hands. In fact, I think of cash as a seed – you can either eat it (spend it) or invest it (sow it).
If you find a $20 bill on the side of the road you can run and put this money in your supposedly tax-free retirement account or buy dinner. But if you use the time value of money formula, you will discover that you actually spent $140.00
Calculate the real economic cost of not investing that cash or having enough income to invest.
FV = pmt (1+i)n
FV = Future Value
Pmt = Payment
I = Rate of return you expect to earn
N = Number of years
To perform the calculation, we make a few assumptions.
*We assume you are 30 years old (and hence 35 years away from retiring at 65). That means that the $20 can compound for 35 years. We will substitute 35 for “n” in the equation.
*Next, we must establish your expected rate of return. Historically, the stock market has returned 12%.
If you want to invest in bonds, your return will be lower. Assume that you invest in a combination of both and expect to earn a 10% rate of return.
This will be substituted for the “i” variable in our equation.
The “pmt”, or payment, is the value of the single amount you want to invest (in this case $20).
Now that we’ve figured out the variables, the formula looks like this:
**FV = $20 (1+.10)35
Enter 1.10 into your calculator (this is the sum of 1+.10).
**Raise this to the 35th power.
**The result is 28.1024.
**Multiply the 28.1024 by the pmt of $20.
The result ($562 and change) is the true cost of spending the $20 today
(if you adjusted the $562 for inflation, it would probably work out to about $140 in today’s dollars.
That means your real purchasing power would increase approximately 7-fold).
Once you understand this concept of time value as it refers to money it becomes obvious that the trips to MacDonald’s costs you millions and millions of dollars in future wealth.
Then you must expand your reach to get to your financial goals. Find a home-based business that will make you money.
You can create multiple streams of income to help fund your new home, car and retirement. By increasing your income and investing extra money you can maintain your standard of living while still providing extra cash for the long and short term.
Virginia R. Sanders is a graduate of the University of Texas in Arlington, Texas. She is the mother of twin daughters, and grandmother to a rambunctious 7-year-old genius named Gary.
Virginia was born in Fort Worth, Texas but now lives in Sacramento, CA. Virginia states that she decided to go full-time in affiliate programs when her grandson asked her the fateful question "Nana, Are You Fixed Yet"
Virginia plowed head strong into affiliate marketing starting with The Cash Mall Concept whose flagship product is the CBMall http://www.thecash-mall-concept.com as a cash generator so she could start investing in real estate.
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