During the Financial Advisors Program which I attended a couple of weeks ago, we were taught about the Time Value of Money.
Investopedia defines Time Value of Money or TVM as the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. It is also referred to as "present discounted value."
Work for Money OR Make Money Work For You
Last week, I was exchanging messages with my workmate who is engaged to be married by the end of 2016. I asked what his long term financial goal is. (Strange enough, money matters has been a part of our random conversations.) His reply was, "Magkabahay lang ako, okay na ko." (After owning a home, I will be okay.)
Then I asked how much would the house cost. He said around Php3M. I asked how much has he saved for that goal. He told me he hasn't started saving for it yet, and that he would most likely just avail of a housing loan from his favorite bank.
And then I made these computations using the app Financial Calculator. I encourage you to download this FREE app.
With its Loan Calculator, I had these numbers.
Given:
LOAN AMOUNT Php 3,000,000
INTEREST RATE 5% annual (conservative rate)
LOAN TERM 15 Years
Results:
Monthly Payment Php 23,723.81
Total Payment Php 4,270,285
Total Interest Php 1,270,285
The computation above is you working for money. This is what many of us know. I asked my workmate if he can pay almost Php24,000 monthly for his house, he gave me a resounding yes.
But let me show you another computation using the Time Value of Money Calculator.
Given:
MONTHLY SAVINGS Php24,000
ANNUAL SAVINGS Php288,000 (Php24,000 x 12)
ANNUAL RATE 10% (conservative rate if INVESTED in the STOCK MARKET)
PERIOD 15 Years
Result:
FUTURE VALUE Php9,150,474
This computation, my dear, is money working for you. And yes, this is the purpose of investment -- for the fulfillment of your long term goals.
And the purpos of this blog, is to educate people that yes, money can work for us. Truth is, money works harder than we do. It doesn't sleep, gets tired, gets sick or goes on vacation.
But My Workmate Wants to Build His House ASAP
Yes, the second computation doesn't make sense to my workmate now. He is 35 and can't wait until he is 50 to have his house built. He can start investing small amount for his future kids instead.
But it may make sense to you.
You may be a 25 year old who wants to go on a European tour five years from today.
You may be a parent who wants to send your young kids to one of the best universities 10 years or 15 years after.
You may be a working mother who wants to be a full time housewife one day soon.
You may be a father who wants to make sure that your kids and grandkids won't be slaves of debt.
Time Puts Value Into Money
Over time, this is what I have realized. Time and money are the best of friends. Time puts value into money. And the more you procrastinate into investing, the more money you are actually losing.
The rule of investing is simple.
Dream BIG.
Start SMALL.
ACT NOW.
Happy long term investing!
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