Picture this: you’ve just planted a single seed, and over time, with a bit of nurturing, it blossoms into a lush garden. This is the enchanting power of compound interest, the secret sauce behind the time value of money. It’s like watching your money perform a captivating dance, growing exponentially with each step. The magic lies in the compounding periods—the frequency with which interest is applied to your principal balance. Whether it’s annually, semi-annually, quarterly, monthly, or even daily, each interval acts as a gentle nudge, pushing your savings or investments to new heights. Imagine starting early, making regular contributions, and then sitting back as your wealth flourishes beyond your wildest dreams. It’s a financial fairy tale come true, where time is your most valuable ally, transforming modest sums into financial freedom. Embrace the beauty of compound interest, and let it weave its spell, turning today’s efforts into tomorrow’s prosperity.
The Golden Rule: Invest Early and Often
Creating wealth goes beyond the standard work retirement account and purchasing a home. To thrive post-retirement, it requires smart financial decisions that demand looking toward your future and making financial moves today that will significantly benefit you later. Diversified investments are key. Women must be financially savvy and smart now. The waves of the Women’s Rights and Women’s Suffrage Movements paved the way for equal rights and opportunities, granting greater personal freedom for women. While the gender salary gap and gender wealth gap still persist, women have more rights today than at any previous time in history. According to ourworldindata.org, women’s rights include physical integrity rights, social rights, economic rights (such as owning property and being paid equally for their work), and political rights. These economic rights extend beyond owning property. It is our right as women to maximize each of our rights fully, from voting to economic rights. Exploring various investment vehicles is essential on the journey to creating wealth and taking advantage of our economic rights.
Why Every Maven Understand the Time Value of Money:
The time value of money (TVM) is a financial concept that asserts that a sum of money has greater value now than it will in the future due to its potential earning capacity. This core principle of finance is based on the idea that money can earn interest immediately when invested through returns on the investment over time. Therefore, money available at present is worth more than the same amount in the future because it can earn interest now and compound interest in the future.
Example of TVM: Retirement Savings
Imagine Melissa, a 30-year-old professional, planning for her retirement. She decides to start contributing $5,000 annually to her retirement account, which earns an average annual return of 6%. Let’s see how the time value of money works in her favor:
Starting Early: If Melissa begins her contributions at age 30 and continues until she is 60, she will have invested $150,000 over 30 years. Using the future value calculation for an annuity-like investment, the total amount she will have at retirement is $395,290, more than double her actual investment.
Total Investment: $150,000
Total Compound Interest Accrued: $245,290
Starting Later: If Melissa waits ten years and starts her contributions at age 40 until she is 60, she will have invested $100,000 over 20 years. Using the same future value calculation, the total amount she will have at retirement is $185,928, which is not even double her investments.
Total Investment: $100,000
Total Compound Interest Accrued: $85,928
The difference in investing early and often is nearly $160,000, which will be greatly appreciated at retirement age.
Example of Education Fund for Children: For the Mothers, Grandmothers, Aunts, Stepmoms, and Godmoms:
Sophia, a mother of two, wants to save for her children’s college education. She decides to set aside $2,000 each year in an account that earns 5% interest. Her goal is to have enough funds to cover college expenses when her kids turn 18.
Newborn: For her newborn, the time horizon is 18 years. Investing $36,000 over 18 years would yield $55,218 in the education fund, with nearly $20,000 in compound interest.
8-Year-Old: For her 8-year-old, the time horizon is 10 years. Investing $20,000 over 10 years would yield $25,155 in the education fund, with a little over $5,000 in compound interest.
A Financial Fairy Tale Come True
So, Mavens, invest early and often. Let that be your financial mantra as you create and execute your financial plan. Waiting is sacrificing compounding interest that would result in thousands of dollars in the future. With today’s rates, even your savings account has no reason not to grow at a minimum of 5%. As of June 2024, the highest savings rates offered by depository institutions are notably competitive, ranging anywhere from 5.55% to 5.30%. Some accounts can be opened with as little as $100, so there is no excuse.
Mavens, it’s time to allow our dollars to work for us. Hold our dollars accountable so we can live abundant lives well into retirement and create wealth for ourselves and our loved ones.
