The concept of time value of money is essentially interest earning interest, or investment gains earning investment gains, which is the same as compounding interest.

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The concept of time value of money is essentially interest earning interest, or investment gains earning investment gains, which is the same as compounding interest.  The earlier you start investing the more you should have in future years, given a reasonable and positive rate of return. Of course, not every year we have gains in the market, but since 1929 the average annualized gain has been around 10 percent. There are a myriad of calculators on the Internet that estimate the future value of an investment but I’ve found that it’s important to understand the basics of compounding interest.  Look at the tables here: /content/enforced/125018-001019-01-2162-OL1-6381/Present Value and Future Value Tables.pdf.  A-1 calculates the future value of a number given years and interest rate; say that you invested $5,000 in a 5-year CD earning 3%, the future amount would equal $5,796.50 (earnings of $796.50 over that 5-year period).  Let’s say that you invest $5,000 each year for 5 years at 3%, the future value would equal $26,545.50 (table A-2); if your investment earned a higher annualized rate of return, say 5%, the amount would be $27,628.00.  Tables A-3 and A-4 provide the calculates for determining the present value of a future amount, essentially what is the value in today’s dollars of a sum of money to be received in the future (either a lump sum or an annuity).  This is explained in the e-Book about the lottery winnings.

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Another aspect of TVM is during your retirement years because it’s especially important to manage your wealth during this time.  Many people believe that once you retire and start drawing your money that you will no longer need to worry about time value of money. In fact, it continues even when you draw down the account.  I have attached a simple chart that describes how long your money will last given the withdrawal rate and annualized rate of return.

/content/enforced/199141-001019-01-2172-OL1-6380/Retirement Withdrawal Table.docx

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