Investing is the action of using your money in a way that earns a return and grows in value. The way to go about it depends on factors such as:
- Amount invested
- Consistency of your contributions
- Financial Goals
Firstly, we need to understand the symbiotic relationship between money and time as well as the ingenious concept of compound interest. Also, if you are just new to getting started investing, check out our Ultimate Investing Guide.
The following Investment Planning Tool will help you plan your investment methods.
Investing: Time Value of Money
The value of money is affected by time. The amount of money you have now is not the same as it will be in the future.
$100 today is better than receiving $100 in 10 years. The concept of Time Value of Money states that money today is worth more than the same amount of money in the future because of the potential of what you could do with it presently (opportunity cost).
Investing this money and profiting from compound interest is a clever path to take.
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.’Albert Einstein
Investing: The Benefits of Compound Interest
Compound interest, also known as interest on interest is a form of earning a return on your investment that calculates on the principal amount plus the accumulated interest of previous periods.
Compounding is a life-changing concept as it encourages investors to invest their money and earn a return on what they initially invested, plus what they have earned through the interest itself.
This is why investors must ensure they are getting an interest that increases the value of their money. The investment portfolio will enjoy the benefits of compound interest and the longer you let it compound, the higher the value. Let’s take a look at how it works by using a Free Investment Planning Tool:
Aus Investment Calculator
How do you figure out how much to invest every month? What is the future size of your portfolio based on current investing behaviours? And what portfolio size do you need to reach your financial goals?
This Investment Planning Tool uses the Payment (PMT), Future Value (FV) and Present Value (PV) formulas to answer all these questions. The tool lets you plan your optimal investing method by entering data according to your situation.
Check out this video explaining step by step how to use it:
How Much Should You Invest?
Whilst this is quite personal information and every person’s goals and objectives vary. (Always remember to consult the services of a licensed financial planner prior to making any investment decisions)
As a guide to figure out how much you should invest you need the following information:
- Portfolio Goal ($)
- Expected Annual Return (%)
- Years until Retirement (Years)
- Current Portfolio Value ($)
As you enter the information into the Investment Planning Tool you can figure out the weekly, monthly, or yearly contribution required to reach your goal.
In the example above, the tool shows that to reach $1,000,000 by the age of 65 you will need to invest $318.84 every month. This is assuming you are 25 years old, you already have $10,000 invested, and you expect to earn an annual return of 7%.
FIRE – Forecasting Your Investment Portfolio Value
Imagine you know how much money you have left to invest after accounting for your monthly expenses. The Investment Planning Tool can help you forecast what your portfolio will look like based on the current amount you have available to invest.
Instead of investing $318.84 every month, let’s say you can only invest $100 every month. The example above shows how the forecasted investment portfolio will be $425,595.45. It is no longer $1,000,000 because the contribution amount has decreased despite having the same expected annual return, the current amount invested and time compounding.
Finding the Present Value of your Investment Portfolio
You can change the parameters of your situation to understand how much money you currently need to have invested to reach your financial goals. For example, what would happen if you wanted to retire in 20 years instead of 40 years?
The results show the current portfolio value is now $206,477.74. This means that if you want to retire in 20 years instead of 40 years you need this amount of money invested already.
FIRE Investment Planner – Prophet’s Take
The examples from the Investment Planning Tool above demonstrate how time greatly affects the value of money as well as the benefits of the compounding effect. You can also utilise the above planners to figure out your time until FIRE.
It is incredibly important to understand how your current investing behaviours and decisions affect your future financial goals.
It is of essence to save and invest money to ensure it increases in value while experiencing the exponential effects of compound interest. The alternative is to ignore this and let it lose value to time and inflation.
Which path are you taking, feel free to add a reply in the comment and we will always reach out!
(Always remember to consult the services of a licensed financial planner prior to making any investment decisions)