What to Deposit Today to Reach a Future Savings Goal
Nobody knows the future. A person who understands the value of proper planning, however, can create their own. A simple anticipation of interest and inflation can allow the forward-thinking person to use a little money today to own a lot later. Read on to discover the best way to plan for tomorrow today.
Understand the Future Value of a Dollar
The time value of money is a tricky economic concept, but it is easier to grasp than you may realize. A dollar today is better than a dollar tomorrow, because a clever investor can capitalize on its earning potential.
Do you want to have a lot of money in 25 years? You may believe that in order to have $250,000 in savings in 25 years, you must save $10,000 a year starting right now. That is not true. The myth about money is that it is a one-to-one ratio long-term.
In fact, if you have only $100 available to invest right now and the intention to add $10 a month over the duration, all you would need to do is earn 5 percent annually on your investment to earn over $6,000. You will have effectively doubled your output.
The concept works on a larger scale as well. If you have $5,000 to invest right now and believe that you can add $200 monthly over the next 25 years, you will have invested $65,000. Thanks to the magic of 5 percent interest, your savings will be over $131,000.
What Is Interest?
Given the above, interest may seem like wizardry. In reality, it is a simple economic transaction. Someone else is willing to pay you a set rate in order to borrow your money for a period of time. They are willing to do this because they too understand the time value of money. They can earn more using your money than they will have to pay you back, even factoring in the interest cost.
Such borrowing practices are a win/win scenario where your money gains you additional money and presumably them as well. If you used a trusted borrower such as the United States Treasury, your money is also protected from loss. The only potential issue is inflation, which occurs as all costs gradually rise, thereby reducing the value of your dollar. Your investment should beat inflation estimates to be viable.
How to Crunch the Numbers
To crunch the numbers, the three initial determinations you must make are how much you have to invest, how much you plan to add over time, and what your target gain is. Once you know these factors, you can calculate the numbers to determine your goal. You can use the above scenarios as a guideline for how the process should work.
Saving for the future and building a nest egg is easier than ever these days. All you need to do is figure out how much money you can afford to invest and what your target savings amount is. Paid interest will take care of the rest.