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

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$2,415,555/40 = 

 

Average Net Profit/Year = $60,388

 

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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