The time value of money concept is one of the most important factors individuals face when it comes to investing assets. Time value of money is the idea that money available today is worth more than the same amount of money available at a future date, because of interest earning potential.
Let’s say you are offered $100 today, or were given the opportunity to collect $100 one year from now. Would you take the money now, or later? Your best option would be to accept the $100 today, because of interest earning potential and opportunity cost.
Taking the payment today would allow you to invest your money in a savings vehicle like a savings account or money market account. Investing your money allows you to earn interest, meaning the bank is paying you a small percentage for using your deposited funds. Therefore, depositing your money in a savings account will allow your money to grow every year.
Going back to the example, the opportunity cost of choosing to defer a $100 payment today is the interest you could have earned through investing your money. Opportunity cost is a trade-off between what you chose and what you could have had. For instance, if you pay $10 for a movie ticket, your cost of attending the movie is not only the $10, but also the time and value of what you could have enjoyed doing instead of going to the movie. That being said, when choosing to spend or save your money, it is important to think about the opportunity cost of your decision, making sure that the benefits outweigh the costs.
The main idea of the time value of money is that as a young investor, you should start saving as soon as possible! The sooner you invest, the higher your interest earning potential, and thus, the more likely your money will grow over time.
Stocks, bonds, and IRAs – oh my! Where should a young investor start? The recorded webinar, “Steps Toward Investing,” explores investment options and strategies. Learn about important investment concepts such as diversification, purchasing power risk, and market risk. Don’t miss out on the opportunity to have your money grow; learn how to invest while you’re still young!
This is a Saving Badge eligible program, so make sure to take the quiz after watching to get credit!
“Steps Toward Investing” is part of the Get $avvy: Grow Your Green Stuff webinar series. Don’t miss the next webinar, “Making the Most of Job Benefits,” on Tuesday, February 24, from 4:00-5:00 p.m. Register here.
Published by O’Reilly as a part of the Missing Manual series, Personal Investing: the Missing Manual provides step-by-step guidance on preparing to invest, choosing and buying investments, and managing investments in easily understandable, engaging, language mixed with a small dose of humor. The introduction aptly points out the investment is a necessary step in one’s personal financial journey, not a choice. It is impossible to accumulate sufficient funds for costly life events such as retirement, education, and vacations with social security and savings accounts alone, given how rates of interest compare with the rate of inflation.
Part 1 of Personal Investing: the Missing Manual focuses on setting your investment goals and cleaning up your finances so you can be better prepared to invest. Part 2 explains how investments work, including funds, stocks, bonds, real estate and investment trusts (REITs), and ends with a discussion of managing a portfolio. Part 3, on investing for retirement, education for children, and health care, may seem less relevant to college students at this point in their lives. However, it is never too early for college students to begin planning for the future as they prepare to graduate and enter the workforce. This ebook is essential for anyone with a new career or unfamiliar with key investing concepts and advice.
Note: This ebook can only be accessed on campus or off campus with your University of Illinois at Urbana-Champaign NetID. If you do not have access to this ebook, please request a print copy through your local public library.
In seeking to improve your financial knowledge, don’t forget about the University of Illinois Library’s resources. Subject experts and print and e-resources can aid your understanding and help you make more informed decisions when it comes to your personal finances.
The Library has many ebooks and books in print that can provide guidance on borrowing, earning, protecting, saving & investing, and spending. Watch for more “Spotlight on Library Resources” posts, in which we’ll feature a particular e-resource that falls into one of these categories.
Both saving and investing have pros and cons, and the best choice depends on your reasons for saving money. Some questions to ask yourself before determining if you should save or invest are: Do I need to be able to easily access my money? Do I intend to save this money for a relatively short or long period of time? Am I willing to earn more money if it also means the possibility of losing more money?
Saving money in a bank is safe, easily accessible, but earns little interest. When compared to investing, there is less risk of losing money if it is kept in a savings account. Depending on which type of savings option you choose—CD, savings account, or money market, for example—you typically do not need a large sum of money to open an account. If you hope to take your money out of savings in a few months, or if you want it to be accessible in the case of an emergency, a savings account would give you that convenience and ease of access. However, if you plan on letting your money sit for an extended period of time, it won’t earn a lot in a savings account, as interest rates are low. Savings accounts also do not protect against inflation, or “purchasing power risk,” which becomes a greater threat the longer your money sits.
Investing can be riskier, but it can also lead to greater reward, and it is usually better option for long-term savings goals (for example, three years or longer). There are several options for investing, including stocks, bonds, and mutual funds. Investments can increase or decrease in value quite rapidly, so the risk involved depends on your type of investment, where you invested your money, when you sell your investment, and other factors, including the fact that your money is not federally insured. However, your potential to earn more money is greater, especially over an extended period of time. One way to help avoid risk is to diversify, or invest in a variety of places (in other words, don’t put all your eggs in one basket). Because of the risk involved as well as the long-term, less accessible nature of investments, investing is a good decision for those who are financially stable and have money secured elsewhere, such as in an emergency fund and/or savings account.