I Hope to Retire Someday

If you break down retirement saving into its most simplest form, it is basically the idea of taking money you have now and maintaining or increasing its value for a later time, like your retirement. Unfortunately, actually making this happen is rarely that simple and involves a combination of savings accounts, Social Security, pensions, or 401(k)s. Luckily, we do have various tools and concepts at our disposal to help us to understand what we need to do to reach our goals, one of which is the Time Value of Money.

The Time Value of Money is the value of money figuring in a given amount of interest for a given amount of time. Chiefly, this is a concept that involves various formulas for calculating compounding interest over time. MATH ALERT! The formula I am interested in today is the future value formula, as indicated below:

FV = PV x (1 + i)ⁿ

"PV" is the present value, "n" is the number of compounding periods, "i" is the interest rate for that period, and "FV" is the future value we wish to determine. So, for example lets use an amount of savings of $1,000 which might be in a bank account that gives 5% interest annually. What will the account build up to after 12 years?

Future Value = 1000 x (1.05)¹²

Using a scientific calculator or a Windows program like MoneyTime we get the result of $1,795.86. Fun, right? Obviously, interests rates fluctuate and you may make periodic deposits, but at the least this formula gives you an idea of what you can expect for the amounts of money you are working with.

For those of you whose eyes glazed over after I mentioned the word "math", this is an important tool that you can use to estimate what kind of wealth you might be able to generate through fixed income instruments like bonds, CD's, or even a high yield savings account. As well, it should demonstrate that a dollar today could be worth a great deal more in the future, thus the "time value of money". In order to generate real wealth, you must first be willing to forgo the use of some of your money now, so that after careful investment it may grow to larger amounts in the future.