The Time-Value of Money

Personal Finance February 20, 2007 Print Friendly and PDF

Here is how time can work for you:

  1. The longer you invest, the more money you will accumulate.
  2. The more money you invest, the more it will accumulate because of the magic of compound interest.

Compounding works like this . . .

The interest earned on your investments is reinvested or left on deposit. At the next calculation, interest is earned on the original principal plus the reinvested interest. Earning interest on accumulated interest over time generates more and more money.

Compounding also applies to dividends and capital gains on investments when they are reinvested. The following illustration and questions give you a firsthand opportunity to calculate the impact of time on the value of your investment accumulation.