Time value of money: How time actually is money

ATK
New Delhi [India], August 22: Have you ever come across sayings like time changes everything or time waits for no one? As cliche and didactic as these sayings sound, they hold great meaning because they apply to everything including your money. Take your wallet out for a minute. Look at the cash you have in it. Say, you have a Rs 2,000 note. The value of that Rs 2,000 is more right now than it will ever be in the future. Why? That’s because of the time value of money.
The time value of money
Why is the money you have right now not going to hold the same value in the future? The simple answer is inflation. Inflation decreases the purchasing power of your money over time. So, even if you have a chunk of money today and you feel financially secure because of it, the value of it will inevitably decrease over time. Sounds unfair, right? There is, however, one way out of this. And that way is investing. Investing your money will not only prevent its value from decreasing but will, in fact, also increase it over time.
This is why investing is the only real way to create wealth. But what is the secret sauce that makes your money grow when you invest it? The answer is compounding. Warren Buffet, the legendary investor and the CEO of Berkshire Hathaway, once said, ‘My wealth has come from a combination of living in America, some lucky genes, and compound interest.’ Buffet’s net worth is $10,430 crores. So if that makes you wonder, what exactly is compound interest and how you can use it to create wealth, let’s break it down.
Understanding compound interest
When you invest a certain amount of money that’s called the principal. The principal earns interest or a rate of return depending on the security you’ve invested in. You then earn interest not just on your initially invested principal but also on the interest you have earned on it. That’s compound interest. Basically, your money multiplies over time because your interest keeps earning interest.
Say you invest Rs 50,000 today in a security that has an average rate of return of 10%. If you keep that money invested for 10 years, due to compounding, you will have about Rs 1,29,687 at the end of the 10-year period. That’s more than double the amount you invested. The interest you would earn on your Rs 50,000 would be about Rs 79,687. This way compounding makes your money earn more money over time.
Were you to wait and invest this amount after 5 years, you would earn Rs 30,526 as compound interest and your total investment amount would be at Rs 80,526. The difference would be Rs 49,161. That’s the time value of money. By waiting to invest your money and losing out on 5 years, you lose potential earnings of Rs 49,161.
The interesting thing to note is that the power of compounding can also work against your favour. This is true in the case of loans. That’s because the financial institution charges compound interest. Say you take a loan of Rs 60 lakhs for 20 years at 10% and opt for bullet repayment. This means you will pay back the amount in one go at the end of the loan term. In such a case you would have to pay back Rs 3.36 crore. You’d be paying back more than five times the money you borrowed because of compounding. A way to combat this is to opt for Equated Monthly Installments (EMIs).
The right way to look at time when investing
Many investors make the mistake of trying to time the market. While time is of great essence in growing your money, it’s not about timing the market but rather about the time your money stays in the market. The time you keep your money invested in the market determines two important things:
1. The risk associated with your investment
The markets are volatile and ups and downs are a part and parcel of any market-linked investment. However, when you stay invested for a longer time, you hedge this risk because your investments have the time to recover from short-term hits due to market volatility.
2. The degree of compounding 
The longer you keep your money invested, the more the proportion of the returns you earn increases vis-a-vis the amount you invested. Let’s use the example illustrated above. 

Benefit from compounding even with small amounts
If you don’t have a lump sum amount to invest today, that’s alright. Begin anyway. You can invest small amounts regularly and still benefit from the power of compounding. Were you to invest even Rs 5,000 every month for 10 years, at the same average return of 10%, you would have Rs 10,32,760 out of which Rs 4,32,760 would be your returns.
If you’re thinking you would need some time to understand which securities to invest in and figure out the world of investing, don’t. Don’t delay your investments further and lose out on the time value of money. With the Appreciate app, you can begin investing right away without having to save a certain amount of money or diving deep into the workings of the market. Simply link your debit or credit card to the Appreciate app and every time you make a purchase, the change from your transaction will automatically be invested in securities to optimise your money.
For instance, if you buy your groceries for the week for Rs 896, we will round it up to Rs 900 and invest Rs 4. Your money is invested in the US market to earn higher returns and to diversify your portfolio. This way our app allows you to not miss out on the time value of money for even a day. Sign up on Appreciate to learn more about change investing,
and growing your money.
(Disclaimer: The above press release has been provided by ATK. ANI will not be responsible in any way for the content of the same)