Question

The time vale of money and compounding are important aspects of your savings/retirement planning.

Explain in your own words (after researching) what is the time value of money ?

Create a scenario whereby you have a 10,000.00 investment and 20 years until you need the money again. How might you invest the money in order to create an imum 50 words)increase in the net/net value (value after any expenses)?

Word document explaining the idea (minimum 100 words) and inserted Excel table with formulas (not static)

Answer 1

1. Time value of money helps investor save for retirement so that they can cover adequately for loss in value of money due to inflation. Inflation causes value of money to depreciate and the interest rate helps reduce or overcome this inflation.

2. Now if we have 10,000 for investment horizon of 20 years, the interest rate becomes crucial. If we invest in debt oriented investments, we earn a lower return say of 5% (lower risk). So the value at the end of the period will be 10,000*1.05^20 = $26,533.

Whereas if we invest in equity or the stock market, the growth rates are higher which means, we get a higher return say of 10%. So the value at the end of the period would be 10,000*1.10^20 = $67,275

So, the rate of return is what makes a big difference for the corpus at retirement.