Time
Value of Money
Think
about this: If I offered you $10.00 right now
or $1.50 or even $1.75 a year for the next 10 years, which would you take?
Probably the $10 bill.
Another
way to look at it: Imagine you won a 1 million dollar lottery or other
kind of settlement that pays over 20 years. That's $1,000,000 ÷ 20 = 50,000.
$50,000 a year sounds great, but you have to subtract federal taxes of about
28%. Now you are left with about $36,000 a year and don't forget to take out
state tax. How far can you get on $36,000 a year now or especially 10 or 15
years from now when that payment will still be coming in?
This
may sound confusing, but stay with it: the “Rule of 72” states that an investment
at a particular rate will double in a certain number of years. You can determine
how quickly your investment will double simply by dividing 72 by the interest
rate that you will receive. For example an investment made at 10% interest
will double every 7.2 years. Does that make sense?
Let’s
say you take only 1 payment of $36,000 and invest it at 10% for 15 years.
15 years later that $36,000 would be $145,142. ($36,000 doubled = $72,000
the first 7.2 years. $72,000 doubled = $144,000 the next 7.2 years, etc.)
Or
you take a lump sum of $250,000, (that's only 25% of what you won) and
invest it at 10% for 15 years. 15 years later that $250,000 would be $1,007,935.
That's more than you won originally and should be enough to keep up with inflation.
Inflation:
We have all felt the effect of inflation in our lives as time goes
by the cost of everything goes up. Gas, food, cars, plane tickets, movie tickets
and the price of a home are just a few examples. The payments you receive
in the future are just not going to be worth very much when you finally get
them.
Buy
a house
Start a business
Take a cruise
Invest it for your future
Buy business equipment
Hire more staff
Pay all your bills
Pay for college