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Wednesday, March 11, 2009

The Time Value of Money

There is a principle in economics which teaches that saving money over a period of time results in impressive gains. That principle is called "The time value of money". Here is the way Provident Living explains it:

"Gradually build a financial reserve, and use it for emergencies only. If you save a little money regularly, you will be surprised how much accumulates over time."
See for yourself using this financial calculator from the Provident Living Website:

For example, if you save $100 a month at 8% for 20 years, and you are in the 25% tax bracket, you will end up with $46,791. Do you wonder why 8% is used? That seems a little optimistic in today's climate! However, according to Provident Living, 8% is the average return on money between 1926-2007. Note that those years include the Great Depression, as well as many recessions. Some years are better then others! Of course, 8% is not a guaranteed return, but financial preparedness is a cornerstone of family security. You can enter your own information on the financial calculator-including your current interest rate and monthly contribution. The time value of money means people who start saving early for future purchases, expenses, retirement, etc. are at an advantage as their money works for them. If you neglected saving early, you are not off the hook! As President Gordon B Hinckley taught: “Set your houses in order. If you have paid your debts, if you have a reserve, even though it be small, then should storms howl about your head, you will have shelter for your wives and children and peace in your hearts” ("To the Boys and to the Men," Ensign, Nov. 1998, 54).

Remember a regular, consistent savings plan is part of being prepared!

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