How Time Affects The Value Of Money

Personal Finance February 20, 2007 Print Friendly and PDF

Investor A invests $2,000 a year for 10 years, beginning at age 25. Investor B waits 10 years, then invests $2,000 a year for 31 years. Compare the total contributions and the total value at retirement of the two investments. This example assumes a 9 percent fixed rate of return, compounded monthly. All interest is left in the account to allow interest to be earned on interest.

Age Years Investor A Investor B
Contributions Year End Value Contributions Year End Value
25 1 $2,000 $2,188 $0 $0
26 2 2,000 4,580 0 0
27 3 2,000 7,198 0 0
28 4 2,000 10,061 0 0
29 5 2,000 13,192 0 0
30 6 2,000 16,617 0 0
31 7 2,000 20,363 0 0
32 8 2,000 24,461 0 0
33 9 2,000 28,944 0 0
34 10 2,000 33,846 0 0
35 11 0 37,021 2,000 2,188
36 12 0 40,494 2,000 4,580
37 13 0 44,293 2,000 7,198
38 14 0 48,448 2,000 10,061
39 15 0 52,992 2,000 13,192
40 16 0 57,963 2,000 16,617
41 17 0 63,401 2,000 20,363
42 18 0 69,348 2,000 24,461
43 19 0 75,854 2,000 28,944
44 20 0 82,969 2,000 33,846
45 21 0 90,752 2,000 39,209
46 22 0 99,265 2,000 45,075
47 23 0 108,577 2,000 51,490
48 24 0 118,763 2,000 58,508
49 25 0 129,903 2,000 66,184
50 26 0 142,089 2,000 74,580
51 27 0 155,418 2,000 83,764
52 28 0 169,997 2,000 93,809
53 29 0 185,944 2,000 104,797
54 30 0 203,387 2,000 116,815
55 31 0 222,466 2,000 129,961
56 32 0 243,335 2,000 144,340
57 33 0 266,162 2,000 160,068
58 34 0 291,129 2,000 177,271
59 35 0 318,439 2,000 196,088
60 36 0 348,311 2,000 216,670
61 37 0 380,985 2,000 239,182
62 38 0 416,724 2,000 263,807
63 39 0 455,816 2,000 290,741
64 40 0 498,574 2,000 320,202
65 41 0 545,344 2,000 352,427
Value at Retirement $545,344 $352,427
Less Total Contributions ($20,000) ($62,000)
Net Earnings $525,344 $290,427


Note that Investor A, who invested much less than Investor B, has a much higher nest egg at retirement age, because of a 10-year head start. As you can see from this example, compound interest is especially magical when money is steadily invested and left to grow over a long period.