The Concept of Time Is Money
Time-value-of-money is the simple idea that money grow over time because it earns interest. And because interest earned in one period can earn more in the next, your money will not grow in a straight line. It will grow exponentially!
We call this exponential growth compound interest. Compound interest so inspired Albert Einstein that once said it was the greatest discovery of the 20th century. In a way, he wasn't kidding. The effect of compound interest is impressive.
To see the impact of compounding, look at these two examples:
Example 1
If you compound $1,000 for 20 years at 5% per year, your money will grow to $2,653. If you compound the same amount over 40 years, you will end up with not 5.3 times, but 7 times your original investment (the exact amount is $7,040). That's exponential growth in action!
Example 2
Suppose you compound $1,000 for 40 years at a higher rate of return of, say, 10%. Then, at the end of that period, your wealth will grow to an astonishing $45,259, the result of saving over a long time at a high rate of return.
As you can see, in addition to time, the compounding effect becomes stronger if you are able to invest your money at higher rate of interest.
The bottom line
Compound interest is a wonderful friend to those who develop the saving habit early in their lives. But if you delay, it will constantly remind you of the wealth that you could have had.
" Money For Something" By Dr. Fong Wai Mun & Dr. Chng Lui
