Time is a commodity that affects almost every aspect of financial planning and investing. At times time is an ally and at times it is a remorseless enemy.
Time affects our financial planning and investments in many ways. For some purposes it is a commodity that can be purchased and sold. Think of a time deposit. You are lending your money to the bank for a period of time. The time which you commit to let the bank have the use of your money is a commodity as much as the money itself. The longer you leave your money on deposit the more interest the bank pays you. Usually the rate of interest will be higher for longer term deposits as well - reflecting the longer time commitment made. Similar considerations apply to the pricing of many other investments including bonds, stocks, options and futures contracts.
Time affects financial planning in many other ways as well. Compounding is one example. The more time investments have for returns to compound the greater the value of the final investment. Compounding is largely a function of time - the longer the time period the greater benefits of compounding are likely to be.
Another example is our lives. The amount of time we have to accumulate savings for retirement and the amount of time we expect to spend in retirement are two of the six critical factors which define how much we need to save for our retirement, when we can retire and what standard of living (financially) we will have in our retirement. (The other four critical factors are our savings rate, the return on our investments, inflation and expected income from other sources such as Social Security). Ultimately, it is time that dictates the advantages of starting to save for retirement early in life.
Thinking about how time affects my financial planning and my investments has had a significant influence over my investment behaviour and financial management.
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