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The Time Value of Money has two components that work hand- in-hand: Time and Compound Interest. Together they create wealth in an orderly and mathematical fashion. The amount of wealth they create depends only on how much time you have, the amount of money you invest and the rate of return you obtain.
FACT: An investment will double in approximately 7 years if it earns about 10% per year.
Let's look at an example of how this works. Let's say you have $1,000 laying around when your daughter is born. If you invested this money for your child that day and it averaged a 10% annual rate of return, that $1,000 would become worth $1,024,000 by her 70th birthday. Not a bad retirement!
Be aware though. If you wait just 7 years to invest the same $1,000, the value at age 70 is one-half what it could have been ($512,000). Why? Because you lost one whole doubling period.
It's not how much you invest that's most important but rather how soon you begin to invest. Time is a powerful component in the wealth accumulation strategy. The magic of compounding rewards those who start early.
Next will look at debt and how it destroys your wealth potential.
Until next time, Al Crisp, CPA
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