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Understanding the time value of money and the power of compounding

One of the most useful concepts for us


Case Study: A young graduate, 25 years old, decided to start saving for retirement.


If she deposit and invest $6,000 each year, assume the average investment return is 10%, how much the account will have when she is 65 years old?


PV = $0; PMT=$6,000; I/Y= 10%; N=40; FV = $2,655,555


Total contribution: $6,000 X 40 = $240,000


Net Profit = $2,655,555 - $240,000 = $2,415,555


Average Net Profit/Year = $60,3888


This example shows how the time value of money and the power of compounding can help to build wealth. The longer time we have, the more wealth we can build, even we start with only a small amount of money. The earlier we start, the better the result will be.




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