TIME VALUE OF MONEY
The following scenario illustrates how powerful the time value of money can be. The example is based on a 5% compound rate with investments made on January 2 of each year.
INVESTOR “B” INVESTS $3,000 AT AGE 27 FOR 39 YEARS
INVESTOR “A” INVESTS $3,000 AT AGE 19 FOR ONLY 8 YEARS
AGE
INVESTMENT ($)
TOTAL VALUE ($)
AGE
INVESTMENT ($)
TOTAL VALUE ($)
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
3,150 6,458 9,930 13,557 17,406 21,426 25,647 30,080 31,584 33,163 34,821 36,562 38,390 40,310 42,325 44,441 46,663 48,997 51,446 54,019 56,720 59,556 62,534 65,660 68,943 72,390 76,010 79,810 83,801 87,991 92,390 97,010 101,861 106,954 112,301 117,916 123,812 130,003 136,503 143,328 150,494 158,019 165,920 174,216 182,927 192,073 201,677
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
3,150 6,458 9,930 13,577 17,406 21,426 25,647 30,080 34,734 39,620 44,751 50,139 55,796 61,736 67,972 74,521 81,397 88,617 96,198 104,158 112,516 121,291 130,506 140,181 150,340 161,007 172,208 183,968 196,317 209,282 222,286 237,191 252,201 267,961 284,509 301,884 320,129 339,285 359,399
Total Investment — $24,000 Earnings Beyond Investment — $177,677 Investor A’s Earnings Increased 740%
Total Investment — $117,000 Earnings Beyond Investment — $242,399 Investor B’s Earnings Increased 207%
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CHAPTER 10: SAVINGS & INVESTMENTS
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