People often overlook the time value of money. Economists know
full well that a dollar received today is worth more than a dollar
received a year from now. Why? Because that dollar could be
invested, saved, or used to purchase an asset such as real estate
that will appreciate in value. What's more, inflation slowly but
steadily erodes the purchasing power of your money, rendering
tomorrow's dollar less valuable than today's.
The relationship between time and money provides the foundation
for virtually every financial decision you will make. Whether you
are saving money for a future event or considering a loan to pay for
a current financial need, you will be greatly affected by the time
value of money. The following are some tips for making the most of
your dollars, today and tomorrow.
Time Value Tips
Whether you are saving for retirement or a down payment on a
home, college funding or dependant care needs, you will be greatly
affected by these simple time value tips.
Time Value Tip #1: The longer you have to prepare, the less your
objectives will cost. Assuming you are able to invest your savings
and earn a positive return, you will always be better off saving for
your goals in advance. Not only will your savings earn interest, but
the interest you earn will also begin to earn interest. This is
called "compounding" and was referred to by Albert Einstein as the
"the most powerful force in the universe." (No one knows whether he
was serious or joking.)
Time Value Tip #2: The higher the rate of return you are able to
secure on your savings, the faster your money will grow. Generally,
the amount of risk you are willing to take on your investments will
determine your long-term rate of return. The longer you have to save
for your goals, the more risk you should take on your investments,
and the greater rate of return you should expect.
Time Value Tip #3: It's almost always better to postpone paying
taxes on your investment proceeds. When you have the choice, you
should usually choose to delay paying taxes on investment proceeds
as long as possible. That's because as long as you retain all your
investment's growth, instead of losing some to taxes, you can
continue to earn more interest on that growth. Once you pay the
taxes, you will never earn interest on those lost funds again. One
way to postpone the payment of taxes is to invest in qualified
retirement plans, such as IRAs and 401(k) accounts. Another tactic
is to invest in annuities, which also allow your money to grow
tax-free until withdrawn.
Time Value Tip #4: Factor inflation into your long-term plans.
When preparing for long-term financial objectives, you must factor
inflation into your plan. Over the last 20 years, inflation has
averaged about 4% per year. At that rate, in 20 years a salary of
$50,000 will buy what only $22,100 does in today's dollars - that's
less than half. Looked at another way, that $30,000 luxury car
you've had your eye on will cost you a whopping $67,872 just two
decades from now!
The cost of some financial objectives will grow even faster than
this -- college costs, for example, have increased by some 8%
annually on average. Planning for such cost increases will ensure
that your asset accumulation level is sufficient to meet your
objectives.
What's the best time to start preparing for a sound financial
future? Twenty years ago, goes the old joke. Failing that, the
second-best time is today. Why not start now by contacting us?
