| |
|
 |
| The Time Value
of Money: It's About Time |
| Time really is money–at least when you're talking about long-term investing. But time isn't always on your side. That's because when you invest, time helps your money grow, but when you don't invest, time eats away at the value of your cash. |
|
| It's easy enough to see that time affects the value of money. After all, which would you rather have: $10,000 now or $10,000 one year from now? You can probably think of two reasons for taking the $10,000 now. First, you can invest it and wind up with more than $10,000 after a year. Second, if prices go up (through inflation, for instance), that $10,000 won't buy as much in a year's time. |
|
| Time also affects the value of money in another way–through the benefit of compound interest. With simple interest, you earn interest on your original principal only. With compound interest, you earn interest not only on the principal but also on the accrued interest. |
|
| Here's how it works–let's say you put $10,000 in your 401(k) plan and it earned 8% every year. That first year your principal will have grown to $10,800 ($800 earned interest). In the second year that principal would have increased to $11, 664 ($1,664 in earned interest–$64 more than year one because of compounding). In 20 years your principal will have grown to $46,609.57–all thanks to the power of compound interest. |
|
| Over time, compounding can really add up. That's why the sooner you start saving, the easier it is to meet your retirement goals. |
|
|
|
