INSIGHT · INSPIRATION · IMPACT!
The Time-Value of Money
Your biggest advantage to accumulating real and lasting wealth
If you’re younger than thirty years old, you possess the single most desirable component of the investing universe–time. Time is the one factor that is the most powerful when it comes to the growth of your money.
If you haven’t yet hit the big 3–0, you have a lot more going for you than you may realize. A little sacrifice now can produce huge rewards for you over the next several years if you follow a few basic rules. So, in essence, you have an investing advantage that a lot of us “older” people don’t have — time.
I was 24 years old when I started learning wealth creation concepts. I had two things going for me other than the fact that I was still young — I had an interest and I had a mentor cross my path who was willing to tell me a few basic things that got me started on a path to wealth accumulation.
Assuming you’re young (in your 30’s) and you have an interest, I’m here to help you take advantage of the time you have to accumulate real and lasting wealth.
One caveat before we move ahead — if you’re older than 30-something, you can still build wealth. It’s just that the time you have isn’t as much of an advantage as it was when you were younger. Don’t allow this to be an excuse not to start.
OK, consider the following 5 basic actions to get the most out of your financial future using the value of time to your advantage. Apply them and watch the essence of your financial outlook take flight before your very eyes.
1. Start Now.
There’s no time like the present (no matter how old you are) to radically affect the future, especially when we’re talking about your financial future. When I was twenty-four years old I was fortunate enough to have a friend — a mentor — who stressed the importance of starting early when it came to investing for my financial future. After I had exhausted just about every excuse I could muster on reasons not to invest, he introduced me to the magic of compound interest. It was all I could do to contain my excitement. I began by reconstructing my finances and my way of thinking. Doing so put my financial future on a very different path than it was on.
I began right away by putting aside $25 per paycheck. At first, it was one of the toughest things to do. Not so much because I needed the money, but more because I was used to consuming the entirety of my paycheck on things my family and I “needed.” Since then, I’ve learned quite a bit about recognizing a true need from a fleeting desire. And what a difference it has made.
I gradually increased the contributions to my savings. My first goal was to be able to save 10% of my income. I managed to hit that goal rather quickly, not because of pay raises (although with every raise since then I have put aside a portion for savings) but because the desire for financial freedom was stronger than the desire for immediate gratification.
As the amount of my savings grew, I became even more motivated. I increased to 15% and then to 20% and to a percentage that you’d likely find difficult to believe today, all while increasing my standard of living.
Building a solid wealth foundation right now is critically important. With capital appreciation and compound interest rates accumulating over time until retirement, the amount you have to save today to meet your goals pales in comparison to the amounts you’ll need to contribute if you wait.
If you simply can’t see a way to set something aside, keep reading. Perhaps some of the remaining concepts will help you to discover areas that’ll free up money within your personal budget so you too can start now.
Remember, nothing begets nothing; while something compounded increases itself over time. In other words, if you do (or save) nothing, nothing is exactly what you’ll have.
Absolutely no one cares about your money as you do. So, take control right now!
2. Live within your means.
One of the toughest financial concepts to master is the ability to live within our means. Oftentimes, it takes more of a psychologically disciplined approach because of the inevitable competing demands for our money, not to mention our appetite, for an increasing quality lifestyle.
As we begin to make money, most of us tend to begin building a lifestyle just beyond what we can afford, effectively living outside our means, because after all, we expect to get raises and grow into a lifestyle. Why not push it a bit to “get ahead?” DANGER-WARNING-DO NOT TAKE THIS PATH!
We begin to rationalize our desires by falsely re-labeling them as needs. What occurred to me over the years as I was saving a significant portion of my income was the fact that I never felt as though I had sacrificed my standard of living. My family and I simply became accustomed to living well within our means while validating the relevancy of desires versus needs. Buying a car, getting married, and purchasing a house are just a few of those needs.
Here’s a dose of reality: no one really cares what kind of car you drive. Sure, the BMW hard-top convertible is nice, but is it worth sacrificing your financial future for? Keep in mind that a vehicle (car, truck, SUV, motorcycle, or boat) is among the biggest obstacles between you and the success of a secure financial future.
Apply the car example to just about any aspect of the concept of living within your means and you’ll quickly realize the essence of the magic behind this truth. By the way, some people never realize this foundational truth. So, master it and watch how you soar past your peers as they wonder just how you’re getting it done.
3. Pay down debt.
Every dollar that’s tied up in paying down debt is one less dollar you can use to save for your future.
Create a plan to reduce debt and then stay committed to it, which will, in turn, allow you to allocate more money toward your savings and investments. This concept could not be truer than for credit card liabilities. Find a way to reduce or eliminate your credit card purchases. Few will disagree on the amount of stress credit cards bring into our lives.
Take control as soon as humanly possible. Transfer balances from high-interest cards to those with lower rates. Ideally, find a card with a 0% introductory APR, and pay the balance off in full before the zero-percent interest clock stops. And seriously consider how your next credit card purchase will affect your savings plan the next time you feel compelled to use it.
While we’re on the topic of debt, I’ll point out that while most debt is bad debt, not all debt is bad. Consider the young man or woman who borrows money to purchase a four-unit townhouse to create rental income while paying down one overarching mortgage. Real estate debt, properly structured, is among the best debt instruments you can own. Held over the long-term real estate investments can leverage your ability to create wealth by generating income through positive cash flow and equity accumulation.
4. Fund retirement accounts.
By employing principle number one (starting now, versus the less desirable alternative of waiting), you effectively “automatically” increase your gradual standard of living simply through the power of time. Should you decide that waiting a few years is your only alternative, it is still a better choice than not investing at all. Realize, however, that the time value of money is extremely difficult to recoup and is a rather expensive missed opportunity. The amount of money one must invest in order to compensate for a “late start” increases exponentially over time. Why not act today while you have time on your side along with the advantage of tax-deferred (and in some cases, even tax-free) growth opportunities that come with retirement accounts?
Put aside as much as possible into your retirement plan at work and at least enough to receive the maximum match your employer may offer. Not doing so effectively results in a net loss to your bottom line because you miss out on “reward” money your employer is offering for your commitment to saving money for yourself. If you can squeeze out even more money from your budget, contribute to a Roth IRA as long as you qualify.
Make a promise to yourself and enlist the commitment of your partner to ensure the money you’re saving for retirement won’t be used until then. Sure, you can take money out of a 401(k) or IRA before you retire if you absolutely must, but there’s generally a penalty–and taxes, too–for doing so.
5. Change your financial mindset.
For some of you, retirement may seem like a distant concept. And, for those fortunate to say that, good for you! Allow it to be a green flag that gives you permission to begin your journey toward a secure financial future.
The sooner you get started, the better off you’ll be…the further ahead of your peers you’ll be, the sooner you can claim financial independence, quit your job, spend time with family, play golf, drive what you want to drive, live where you want to live…however you want to live. By adopting sensible money habits, conquering your debts, and saving for retirement early in life, you’ll reap the reward of a secure retirement.
“Time has a way of reminding us of its perishable nature in the retrospect of our reflections.”
Take control of your financial future by leveraging the time-value of money. Start today and you’ll be well on your way to Living Your Best Life before you know it.
