Time Value of Money

It is very important to understand the concept of the Time Value of Money

The Rule of 72 is the first concept: Money doubles when the interest rate and the number of years equals 72. An investment that has a 9% return will double in 8 years, 9 times 8 = 72. The reason it is 72 instead of 100 is because of compounding interest.

Growing Money is an exponential function not a linear function. What this means is that getting money to double again is very important. So a small difference in return on your investment can have a huge impact on your money over time.

Let me illustrate: $10,000 invested for 30 years at 3%, 5%, 7%, 9%, & 11%:
3% = $24,272
5% = $43,219
7% = $76,123
9% = $132,677
11% = $228,923

Notice that a 9% return gave about 6 times the amount of money versus a 3% return. If it was a linear function it would have been only 3 times more.

What is the bottom line? Time & Sound Investing is Your Friend