The Time Value of Anything

"Compound interest is the most powerful force in the universe.  He who understands it, earns it. He who does not understand it, pays it."  Albert Einstein

Time does things to things.  You've heard it said that "time heals all wounds."  I have found that that is not necessarily true.  But one thing's for sure, the pain of the wound usually diminishes significantly over time.  This depletion of pain applies to physical as well as emotional wounds. Physical pain can subside quite quickly, but grief, insults and other emotional injuries can linger for years.

In 1982 an insurance agent changed my life.  Without a doubt he changed my financial future, but he changed me. He was trying to get my wife and me to invest in a monthly accumulation program called a tax-sheltered annuity (TSA) through the hospital where she worked.  The program was already approved by human resources. All she had to do was sign her name for the automatic pay period withdrawals to start. On a financial calculator, he showed me something that through nineteen years of formal  education  I had never seen.  He showed me the time value of money(TVM). The agent showed me what $25.00 per pay period  could accumulate to over our financial lifetimes. We didn't have a lot to invest,  but we could consider $25.00.

In this case, he used thirty years for the future value computation.  Because his program involved managed investments, there was no fixed interest rate. So he showed me this accumulation at a hypothetical  8, 10  and 12%. I found the results of his calculation to be remarkable. At 8% interest, our $25.00 would accumulate to $54,761,00. At 10% the result was $123, 685.00. At 12% over thirty years, our $25 per pay period would accumulate to $191,592.00. The only variable in these three scenarios, a difference of about $140,000.00, was the rate of return. In an instant I understood why everybody in town was after my $25.00. Turns out it was worth quite a bit. I understood why investors invest and why they took risks.  My wife signed the form.  Although she worked no extra minutes or hours, and with no extra effort on her part, the money began to accumulate just as the insurance agent said it would.

But as I said, time does things to everything. Time is so important that through his General Theory of Relativity, Albert Einstein demonstrated time to be a dimension  of space along with height, width and length. This phenomenon he called space-time. He said that the sun's gravity, for example, doesn't attract the earth like a magnet.  The earth falls through the fabric of space-time to make its annual pilgrimage around the sun. This phenomenon repeats itself with every heavenly body in our solar system, our galaxy and throughout our vast universe.

Time does things to relationships. In a significant relationship such as marriage, each person invests love and trust. Over time that love and trust grows. Each person not only makes contributions, but can also make emotional withdrawals. Just as with money, the contributions need to exceed the withdrawals so the emotional resources are not depleted.  It's important too that each partner is making both the contributions and the withdrawals for the relationship to be viable and healthy over time. I've been to some very sad 50th anniversary celebrations. Marriage shouldn't be an endurance test. It's possible for a bad marriage to last too long. Not everything gets better with age.  Our miserly neighbor had hoarded hundreds of cases of food in his basement. When his daughter and son-in-law opened them after his death, there was nothing in them. The boxes were still there, but they were empty.  I read once that if you want an expensive wine, buy a five dollar bottle and leave it alone for fifteen years. But even fine wine can turn to vinegar over time. One marriage can grow into a sheltering tree and another become an empty shell. It all depends on what the couple invests in the relationship over the years.

Four years after the fateful conversation with the insurance agent, I had become so fascinated with the concept of the time value of money that I passed the Series 7 stockbroker exam. I became a financial advisor with IDS/ American Express Financial Services. During that time a local high school home economics teacher invited me every year to speak to her class. What did I talk about? TVM.   I showed her students  how to read a compound interest table. I showed them what $10 per week could accumulate to over forty years with three hypothetical interest rates. No one ever seemed amazed, but at least they saw the concept many years before I did.

So if you and the person you love invest wisely over time, The Golden Years can be a reality. But you need to get started while time is on your side. Compounding only works when something's there.