How to be Successful in Investing from Kiplinger — Part IV

Here’s a question: If you are given $10,000, would you rather take it now or a year from now?

Of course everybody will choose to put the money in the pocket right away instead of waiting another year and the reasons are simple: 1) If the money will be sitting somewhere other than high yield savings account for the next twelve months, you loss the interests that you could ohtherwise earn; 2) The promised $10,000 will not worth that amount in tomorrow’s money as inflation will also erode its value.

In the fourth part of the Kiplinger’s “The Five Keys to Investing Success” series, the author opened the discussion with the above question and suggested that in order to be successful in investing, you should “Keep Time on Your Side.” That is, when making a financial decision, attention should also be paid to the time value of money. The author further illustrated the time value of money concept with the following statement:

The time value of money works against you if you’re the one waiting to collect the money, but it works in your favor if you’re the one who has to pay. Success often lies in being able to identify the proper side of the equation. You just need to keep in mind this principle — a dollar you pay or receive today is worth more than a dollar you pay or receive tomorrow.

An example of why today’s money is more valuable than tomorrow’s is saving/investing for your kids’ education. Today, the average cost of four-year private schools is $30,367, 5.9% higher than previous year. At this rate, by the time your new born enters college, the bill could top $85,000 for an average-priced private college, a significant amount by any means. The best way to pay the college costs is, using the time value of money concept, to pay the bill today. If you have thirty grands and invest the money, with a reasonable annual return of 8%, your child’s college bill will be fully covered 18 years later. If, on the other hand, you can’t set aside that amount now, “invest as much of it as you can as soon as you can to get the time value of money working for you, easing some of the burden when the college bills come due.”

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