Lesson 2 - Value of Money - Part 2

The Importance of Time

As with many investment, we might have more than one option available to us. I once had an opportunity to invest 1,000 dollars and could pick Investment A or Investment B.

1. Investment A
1. 8% Return over 40 years, Low risk short-term and low risk long-term


2. Investment B
1. 10% Return over 40 years, Risky short-term, low risk long term

In making my decision, I would have to compare the difference between A and B. Investment B offers 2% more return but also has more risk in the short-term. While 2% might not seem like a whole lot, over the course of 40 years, it can add up to a significant amount of difference.

In 40 years Investment A would earn me $21,700, however Investment B would have earned nearly $45,200. Investment B has earned nearly double the amount, but was only 2% more interest a year. This is the power of an investment over TIME.

We must always calculate the marginal difference over the life of the investment and take this information into consideration when coming to a conclusion. If the Goal is a Foundation Goal, we should ensure that it has the least risk possible while obtaining the Goal. If my Foundation Goal was a vacation, and $20,000 was the cost 40 years from now of the vacation (Foundation Goal) then I would choose Investment A.

However, if our Goal was for long-term savings and was not a part of the foundation Goals, then we could go for a more risky investment. Remember, we can choose riskier investments as we move up from the foundation level. We will talk about assessing the Risk of an investment in a later lesson.