Sí, Money! Vol. 1, No. 1   September 2007  http://simoney.us
By Michael Grodsky

You’ve gotten your act together, or are on the way to do so. You’re making money, but what do you do with it? What should you know?

Using the concept of the Time Value of Money (TVM), you can move towards creating a financially independent future. If you understand how it works, you’ll want to begin taking action sooner rather than later. What’s the secret? Because it requires a long-term perspective, most people will not focus upon the opportunity it provides due to the demands of daily living. So it effectively remains a ‘secret’ to many.

TVM and compound interest work hand-in-hand. Some believe that Albert Einstein answered “compound interest” when asked, “Hey, Einstein, what’s the greatest discovery of the 20th century?” The fact that he never wrote or said anything like that makes the effects of compound interest no less amazing, no less important to your future. But first, what is it? It’s simply the process of an investment earning a return, and that return is then added to the original investment. And on and on, over time. Why is that such a big deal?

In Kurt Vonnegut’s wonderful little book Cat’s Cradle a scientist creates a substance called Ice-9 that causes water to freeze at room temperature. Every ocean on the planet would instantly freeze if Ice-9 crystals touched a single drop in one ocean. TVM is kind of like Ice-9, but instead of working instantly it gathers steam slowly at first, but then watch out! The result, given enough time, is inevitable wealth and financial independence: a very big deal indeed.

Carlo, a young artist of 27, decided he wanted to throw away over $100,000. He didn’t put it that way, but that’s the reality. Perhaps he felt he didn’t deserve to take care of himself, or maybe he was just too busy. He told me he wanted to delay beginning his savings plan until he felt more “settled” in his life. It is true that he couldn’t afford to invest very much. So what harm could ensue from a few years’ delay, given the relatively small amount in question–$168 bucks a month, or 5% of his income? Maybe better to wait after all…

I used to be just like him, believing that the future will take care of itself, and me. I can’t speak for Carlo, but for me a lack of knowledge and inertia informed that wistful hope springs eternal attitude.

Where is that $100,000 my young friend so effortlessly threw away? It lives 38 years in the future, a distant tale of lost opportunity. For if he had saved $2000 each year for only two years in a row then stopped–only $4000 total, mind you–at age 65 that $4000 could become $169,000 (assuming an average annual return of 10.5%; the S&P500 ¹ average annual return for the period 1/31/1987 – 1/31/2007 is 11.17%). Look, there’s often too much month left at the end of your money, but I hope you’ll make a commitment to start saving now, after what you will have learned by the end of this short column.

What might my friend have accumulated by age 65 if he continued his $2000/year savings plan for 38 years, given the same assumption of 10.5% average annual return? A nice $914,000, thank you very much. Waiting two years, though, will have cost him $169,000. If he saved at a recommended 10% to 15% of income, he would of course have far more. And he’d need it, because 38 years of inflation means $914,000 might be worth only $300,000 in today’s dollars.

Here’s the show-stopper that really demonstrates TVM’s power: Imagine that at age 20 you started saving $2000 per year for ten years in a Roth IRA, then stopped. Your account would be worth about $36,000 at the end of those first ten years (assuming 10.5% annual return). Let’s say that over time you had a successful art career, partnered up with a loving someone, had kids (or a dog or elephant) and saved a bundle, but you left your original investment alone. A long time passes, and now you’re 70 years old. How much is that IRA worth, the one to which you contributed a total of $20,000? It’s grown to $1,860,000, and it’s tax-free to boot (because it was invested using a Roth IRA). How many 70 year-olds alive today do you imagine could use that kind of money? Does this sound like anything in which your future self would be interested?

Choosing the dollar amount to save, the institution at which you hold an account, the type of account (such as an IRA, Roth IRA, SEP, 401(k)), and the investment itself are important considerations. Investor education tools can be found at:
•    latimes.com (click on ‘Business’ in left hand menu, then on ‘Money Library’)
•    U.S. government website for investors (http://www.mymoney.gov)
•    The American Association of Individual Investors, a nonprofit organization that arms individual investors with the education and tools they need to build wealth (http://www.aaii.com)

There’s a saying: today is the hardest day to invest, but it’s the only day you’ve got.

Michael Grodsky is a financial advisor (aquariusfinancial.com) who works with artists, collectors and business owners. Registered Representative offering securities and investment advisory services through Independent Financial Group, LLC, member FINRA/SIPC. This column is meant to provide general information, and should not be construed as providing individual financial advice. For investment, legal, and tax advice see your advisor, accountant, and attorney. Email: michael@aquariusfinancial.com
© 2007 Michael Grodsky