I find myself having more and more general financial literacy conversations with people as word gets out about my obsession with the Fee-Only-Fiduciary Financial Planning world. Based off a recent conversation, I was inspired to write this post. For those reading, the younger you are – the better this may serve you.
Two good concepts for people to know about are the Time Value of Money and the Power of Compounding Returns. Finding information on either topic is simply a Google search away, however I’d like to illustrate both concepts – and the power of each – in a way that (hopefully) resonates better than a financial journal. A quick overview of each:
Time Value of Money: A dollar is worth more today than it will be in 10, 15 or 50 years.
Compounding Returns: Your investment portfolio, over a long time horizon, will generate returns. Those returns will then generate additional returns on top of your original investment. What this gives you is, returns on top of returns on top of returns (hence, “compounding”).
Rule of 72: The rule of 72 is an easy, quick way to figure out how long it will take to, at least hypothetically, double your money. If you expect annual returns of 5%, then it will take roughly 14.5 years (72/5 = 14.4) to double your money.
Since the professionals of young and old can enjoy a bottle of wine, let’s use that for our example.
Essential information
•If you are 21 years old and go out to buy one (1) bottle of wine today, keep in mind that if you invested that money instead and got a 5% return each year, you could buy almost seven (7) bottles of wine at age 65.
•If you are 40 years old and looking at a nice bottle of Silver Oak, you could put off the purchase and invest the funds, to afford almost three of those bottles at age 65.
If you would like more detail or would like to discuss your own particular scenario, please get in touch. We love to educate and we love to help.
Footnote: All information assumes 5% annualized return