Understanding financial concepts can help you make better decisions. Time and money relate to each other as in “Time is money.” A dollar in your pocket today is worth more than a dollar received five years from now.
Invest your savings today to have more money tomorrow. This earnings capacity’s potential depends on how you invest the money and earn on its interest rate.
A different and more beneficial way is to earn income through compound interest, closely related to time’s money value.
Compounding serves as the basis of the time value of money.
Compound interest is one of the most powerful forces of investing. It fuels the urgency to set aside money early for your retirement. This financial term simply means that you add interest to the sum of a loan or deposit or interest on interest.
The power of compounding interest, linked to the time value of money, will benefit you the most if you save and invest early. Let your earnings accumulate and grow rather than withdraw cash from your accounts.
It makes a big difference if you start saving for your retirement ten years later than your friends or if you invest for ten years and then stop contributing to your 401K retirement account. It is difficult to catch up by doubling the amount if you start investing later on.
There is only a tiny probability of winning the lottery. However, it uses the time value of money calculations (present value and future value) to decide whether to win a lump sum or annual payments. Lottery winners, after the rush of adrenaline, have a choice to make regarding time and money.
Choosing the annuity may be better for tax implications than the lump sum. Receiving a large lump sum can lead to sudden wealth syndrome and the risk of overspending for many people.
When borrowing money, compound interest works against you. Your lenders are reaping the benefits of earning interest on interest on your loans. Consider this when going for a loan such as a mortgage, student loan, personal loan, and credit card.
The opportunity cost of any decision is the cost or the value of the following best alternative that must be foregone. We have many choices that may consider time, money, effort, health, and enjoyment in our lives.
The time value of money and compound interest are among the most important financial concepts. Understanding these terms can improve your decision-making when managing your finances. Time is money though time is a priceless resource.