This video on the time value of money is one of the three videos in our Finance 101 video series. The video provides an example of the power of compounding by comparing the returns of two hypothetical investors: Joe Early and Joe Everybody. You can view the details of the example by clicking on the PDF. The video is also transcribed below.
This video is a little sample from the Finance 101 meetings that we do with our client’s children.
Young adults need to learn about money and investing – this story is about the time value of money.
There are two people in this story: Joe Early and Joe Everybody.
Joe Early starts early – 22 years old and putting away $2,000 per year ($166 per month) for eight years and he stops. A total of $16,000 is all that he put away. And we are giving him a really good investment that does a 12% return per year.
The other guy, Joe Everybody, waits until 30 to start saving the same $2,000 per year and he goes all the way until age 65 saving a total of $72,000.
So Joe Early saves $16,000.
Joe Everybody saves $72,000.
Same exact investment returns. What happens?
Joe Early finished with over $1.6 million.
Joe Everybody, even though he put away a lot more money, never catches up. He’s got just over $1 million and still did great but $600,000 less than starting early.
Now the early guy is sharp, he’s not going to stop at 30. He’s going to keep putting away the $2,000 per year and it’s going to get easier and easier as he becomes more successful and has a higher income.
But this time value of money illustration shows how valuable it is to put away a little bit of money early and is important. Let’s teach our kids to do it, let’s encourage them to do it, and if we can let’s put it away for them to give them a head start.
Disclosure: This is a hypothetical illustration and is not intended to reflect the actual performance of any particular investment. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Individual investor’s results will vary. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.