A Visual Look at the Time Value of Money

Compound interest is the eight wonder of the world – Albert Einstein

In Finance 101, you learn about the time value of money and the power of compounding.  Basically delaying instant gratification, in exchange for a greater return in the future. Many calculators online let you plug in variables and spit out a number for you.  Basically Einstein thought this was pretty cool stuff, and he was a smart dude with stylish hair.

I thought it would be useful to have something a little more interactive for people to play with.  Below, in Excel format, is  a future value interest factor of an annuity (FVIFA) calculator which also has a visual component to it.  Not only does it show the year by year figures plotted out, it visually shows the impact time can have on your money.

Basically you can plug in and play with a few variables.

Cell A2 is the interest rate.  I defaulted to 10% for an all stock portolio.

Cell D2 is the annual amount you save.  I default to $10,000 just as a nice round number.

For Age in Cell B2, I am basically assuming someone starts at age 25 working after finishing college.  A few things to notice when looking at the default variables.  After 4 years of investing, the return you’ve made on your investment is actually greater than 1 years worth of saving, pretty quick wasn’t it (cell G5).  Investing $10,000 and earning a 10% annual return would have you crossing the million dollar marker at the age of 49 or 25 years of investing (cell E26).  Something else to notice, this is based off saving $10,000 per year, that isn’t even maxing out your 401(k).  Looking at the chart, you see over time the blue section of the chart gradually becomes the smaller part of the bar.  Basically your principal is becoming less of a factor for you and your returns are making up the greater component of your future assets.  I often refer to this as my money working harder than I do.

Want to hit FI or retire early, change cell D2 to $18,500.  Suddenly, you’re hitting the 2 comma club after 19 years of investing.

Hope you find this useful to play around with.  Feel free to download the file to mess around with it.  Just remember, this is a calculator, you still have to actually take action on your part.

 

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