The Time Value of Money

The most valuable thing you never learned in school.

I hated maths in school – not because i wasn’t any good at it, but because 99% of the time i failed to see the practical application of anything i was learning in the real word (for my personal journey anyway- i’m sure the physicists out there would disagree)

Even throughout my career in businesses operations, the most intense analysis i performed consisted of what is essentially basic arithmetic and ratio analysis. Not once have i used a quadratic equation, algebra, calculus, or geometry!

All that said, i do have one regret. Perhaps i wasn’t paying enough attention, or perhaps my teacher just didn’t engage me in the right way…
whatever the reason, i wish i could go back in time, march into my year 10 maths class, shake myself and say ‘Saul, listen up – in about 2 minutes time, Mrs Jones is going to write something on that blackboard that will change your life forever. Learn it and apply it, start now, and you will be a wealthy man’. Well, as it turns out i didn’t get a visit from my future self in year 10, and it took until my mid 20’s to truly discover the importance of this simple concept, but fortunately thats still early enough for it to change my life… I’m talking about Compound Interest.

Let me give you an example….

If i was fortunate enough as a 15 y/o in 1999 to receive a visit from my future self, and he told me to invest $400.00 in an ASX index fund, increase my yearly investment amount by $100.00 each year and just pretend like the money didn’t exist, 18 years later my wealth today would look something like this….

$52,786

Of that sum, i would have chipped in $23,600 out of my own pocket.

Seems ok right. Might buy me something cool, could be an epic 2-year holiday, or it might be a deposit for a house. Or… because at this point my investment instalments are only costing me $2200.00 per year, i might just decide to keep up the routine for another 18 years…

In 2035, as a 51 y/o my yearly investment routine has ‘cost’ me $81,400, but the good news is that now my investment looks something like this…

$380,762

Wow. Now we’re talking. That’ll pay the balance of the mortgage, cover my daughters wedding, put all 3 kids through uni, take the wife on an extended holiday, and buy a new car….. or, since my investment instalments are only costing me $4300.00 per year i could just keep up the routine till retirement at age 65.

Since i don’t miss it, i just keep contributing a small % of my wage to my (not so little anymore) nest egg until i’m 65. In 2049 i hit retirement age and my rainy day money is worth…

$1,403,241

Now to be clear, this is not my net worth at this point. This doesn’t include my superannuation which has been compounding away in a similar fashion but getting much larger yearly contributions, (circa 10% of my before tax wage) or the other assets that i have acquired, no, this is just the result of my rainy day money compounding away at the long term stock market average return of 9% p.a – and i have built this wealth by contributing only $147,900 of my ‘hard earned’ capital.

Heres is what compound interest looks like.

*Contributions made at beginning of each year. Does not consider the effect of taxation or brokerage.

Now, just to make things really interesting, lets pretend that it wasn’t my future self who bestowed upon me the wisdom of compound interest… It was my Great Aunt Ethyl, who also happened to leave me $10,000 in her will in order to kick me off on my investing journey. My total investment contribution, interest, and total investment value at the same 3 age points would look like this.

Year Age Actual Capital Contribued Investment Returns Total Value
2,017 33 $34,700 $69,503 $104,203
2,035 51 $91,400 $531,901 $623,301
2,049 65 $157,900 $2,055,839 $2,213,739

So my $10,000 kick starter has helped boost my investment by an extra $810,498 by the time i hit retirement. Thanks Aunty Ethyl!

Compound Interest truly is just about the closest thing there is to magic, and if there is one mathematical concept i’d encourage anyone i care about to embrace, this would be it. Start early, contribute consistently, and let time do its thing.

Happy Investing.

For the full workings, please see below.
If you have a future financial goal, compounding investment returns can help you get there. Be sure to discuss the best approach for your unique personal circumstances and risk tolerance with a licensed financial planner.

Annual Investment Returns  9%
Year Age Start Balance Yearly Investment Investment Return Closing Balance
1999 15 $0 $400 $36 $436
2000 16 $436 $500 $84 $1,020
2001 17 $1,020 $600 $146 $1,766
2002 18 $1,766 $700 $222 $2,688
2003 19 $2,688 $800 $314 $3,802
2004 20 $3,802 $900 $423 $5,125
2005 21 $5,125 $1,000 $551 $6,676
2006 22 $6,676 $1,100 $700 $8,476
2007 23 $8,476 $1,200 $871 $10,547
2008 24 $10,547 $1,300 $1,066 $12,913
2009 25 $12,913 $1,400 $1,288 $15,602
2010 26 $15,602 $1,500 $1,539 $18,641
2011 27 $18,641 $1,600 $1,822 $22,062
2012 28 $22,062 $1,700 $2,139 $25,901
2013 29 $25,901 $1,800 $2,493 $30,194
2014 30 $30,194 $1,900 $2,888 $34,982
2015 31 $34,982 $2,000 $3,328 $40,311
2016 32 $40,311 $2,100 $3,817 $46,228
2017 33 $46,228 $2,200 $4,359 $52,786
2018 34 $52,786 $2,300 $4,958 $60,044
2019 35 $60,044 $2,400 $5,620 $68,064
2020 36 $68,064 $2,500 $6,351 $76,915
2021 37 $76,915 $2,600 $7,156 $86,671
2022 38 $86,671 $2,700 $8,043 $97,415
2023 39 $97,415 $2,800 $9,019 $109,234
2024 40 $109,234 $2,900 $10,092 $122,226
2025 41 $122,226 $3,000 $11,270 $136,496
2026 42 $136,496 $3,100 $12,564 $152,160
2027 43 $152,160 $3,200 $13,982 $169,343
2028 44 $169,343 $3,300 $15,538 $188,180
2029 45 $188,180 $3,400 $17,242 $208,823
2030 46 $208,823 $3,500 $19,109 $231,432
2031 47 $231,432 $3,600 $21,153 $256,184
2032 48 $256,184 $3,700 $23,390 $283,274
2033 49 $283,274 $3,800 $25,837 $312,911
2034 50 $312,911 $3,900 $28,513 $345,324
2035 51 $345,324 $4,000 $31,439 $380,763
2036 52 $380,763 $4,100 $34,638 $419,500
2037 53 $419,500 $4,200 $38,133 $461,833
2038 54 $461,833 $4,300 $41,952 $508,085
2039 55 $508,085 $4,400 $46,124 $558,609
2040 56 $558,609 $4,500 $50,680 $613,789
2041 57 $613,789 $4,600 $55,655 $674,044
2042 58 $674,044 $4,700 $61,087 $739,831
2043 59 $739,831 $4,800 $67,017 $811,648
2044 60 $811,648 $4,900 $73,489 $890,037
2045 61 $890,037 $5,000 $80,553 $975,590
2046 62 $975,590 $5,100 $88,262 $1,068,953
2047 63 $1,068,953 $5,200 $96,674 $1,170,826
2048 64 $1,170,826 $5,300 $105,851 $1,281,978
2049 65 $1,281,978 $5,400 $115,864 $1,403,242

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