Time Value of Money

"I finally know what distinguishes man from other beasts: financial worries." Jules Renard


What is time value of money? The value of a dollar today will not be the same as the value of one dollar in the future due to inflation. Inflation erodes the purchasing power of our money.

Your personal inflation rate is calculated based on a basket of goods and services that you consume personally and would include groceries, toiletries, clothes that you buy, the restaurants you go for your meals, the holidays that you take, the movie tickets that you buy. Your personal inflation rate is an indication of your personal lifestyle. You should ascertain that you can control and manage your spending and be mindful of your cost of living.

How does your personal inflation rate affect the value of your money in relation to time? You can use the Rule of 72 to compute approximately the time period your value of money will be reduced to half from today's value for a given amount of money that you have now, based on the the quantum of the inflation rate that you experience.

If the inflation rate is say 6%, the purchasing power of your $1 will be worth about 50 cents in about 12 years' time (72 divided by 6 gives 12). The higher your personal inflation rate, the faster the value of your money will be reduced. It is therefore crucial that your money is invested at a rate higher than your personal inflation rate or else your purchasing power will be reduced over time.

Likewise, if you want to know the time frame needed to double your money for a given annual interest rate, apply the Rule of 72 again. If your bank offers you 3%, it will take about 24 years for your money to double (72 divided by 3 equals 24). If you have an investment opportunity that offers say 24%, it will take only about 3 years for your money to double.

If you are looking for some reliable programs which can offer much higher returns than your bank, you can explore some of the programs listed on my list of reliable programs. However bear in mind that though these programs have been performing well, past performance is not a guarantee of future performance. Invest only what you can afford to lose and never borrow money to invest.

"If you think nobody cares if you're alive, try missing a couple of car payments."