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YOUR FINANCIAL OBJECTIVES AND THE TIME VALUE OF MONEY

YOUR FINANCIAL OBJECTIVES AND THE TIME VALUE OF MONEY


MONEY AND TIME


The relationship between time and money lays the groundwork for almost every financial decision you'll make. Whether you're saving money for a future occasion or considering a loan to cover a present financial need, the time value of money will have a significant impact on you.


For two fundamental reasons, this is correct. First, today's currency can earn interest or appreciate in an investment account, increasing its value over time. Second, inflation has an effect on the value of your currency. Because the cost of things rises over time owing to inflation, the value (or purchasing power) of your dollar falls.



TIPS FOR SAVING TIME


Whether you're saving for retirement, a down payment on a home, college funding, or dependent care, a few easy time value recommendations will have a significant influence.


Time Value Tip #1: The more time you have to prepare, the less your goals will cost.

If you can invest your money and make a positive return, you'll always be better off investing for your goals ahead of time. Your savings will not only earn interest, but the interest you earn will also begin to earn interest. This is known as "compounding," and Albert Einstein referred to it as the "ninth wonder of the world."



Second Time Value Tip: The higher the interest rate you can get on your savings, the faster your money will grow. 

In general, the amount of risk you're willing to take on your investments determines your long-term rate of return. The more time you have to save for your goals, the more risk you should take with your investments and the higher the rate of return you should expect.



Time Value Tip #3: It is usually preferable to defer paying taxes on your investment profits. 

When you have the option, you should seek to defer paying taxes on investment proceeds for as long as possible. Because you can continue to earn more interest on your investment's growth as long as you have it in your hands (see "compounding" above.) Once you've paid your taxes, you won't be able to earn interest on the money you've lost. One way to postpone paying taxes is to invest in "growth" oriented assets rather than "interest" oriented assets. Another is to take advantage of qualifying retirement programs whenever possible.


Time Value Tip #4: Take inflation into account when making long-term plans.

When planning for long-term financial goals, remember to account for inflation. Inflation has averaged 2.23 percent each year during the last 20 years. Some financial goals will grow much faster than this — education fees, for example, have grown at a rate of 6% per year on average. Planning for such spikes in costs will guarantee that your savings level is sufficient to accomplish your goals.

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