The new year has begun, and there are many reasons to start anew. Most are probably thinking about their income tax return; possibly using the money to make a nice investment purchase, saving for education, or for a down payment on a new home. Either way, that income tax return is already being spent before that big check is received. The next thing that doesn’t come to mind is where to put the money for the time being, so it’s either held onto or kept in low-interest rate savings accounts. One's tax refund should be working to earn more money rather than collecting dust in a safe. Allowing time and money to work together will provide a powerful tool for financial success.
In the financial profession, there is a phrase called the time value of money, and most people are not aware of what that means, but simply put, the time value of money is explained, in part, by investing funds into an account that pays interest at specific periods (monthly, quarterly, semi-annually, annually) during a duration of time. These investments are called financial securities and are a description of the various types of investments such as stocks, bonds, money market; as long as there is a form of receipt of future benefits on that investment. That receipt of future benefits (return) is based on the interest rate set in the terms of the investment, provided by the financial institution.
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To further illustrate the explanation on time value of money, suppose an investment of $100 that pays an interest of 2% yearly for 5 years (duration of time). Each year, if interest is paid out directly without reinvesting (putting back into the account), there is a payback of $2.00 that is earn for a total of $10 in 5 years. Of course, this number changes if reinvesting the $2.00 earned in the first year earns 2% interest in the next year.
Share certificates provide a higher rate of return (payback of your savings) than do traditional savings accounts but do have penalties and fees for early withdrawal and in most cases required to retain the account for a minimum of one year. These factors tend to vary from institution to institution and is posted or provided in the front lobby. In most institutions, there are higher returns the longer duration of time when investing in share certificates, and again, it depends on each institution.
Stocks are a form of financial security but stocks carry more risk and are harder to predict as the prices are affected by more than just the company's performance. Stock prices also change due to external factors like politics and speculation Some do not have payouts called dividends.
Additional types of financial securities are bonds and money market securities. Bonds have a long maturity date of 10 years or up to 30 years, but that also means there is interest earned on the investment during that duration of time. Bonds are a great way of investing if there is no immediate need on the invested funds. Other types of financial securities to invest that earn interest are treasury bills and treasury notes. The bills have a shorter holding time, mostly in weeks, however with very low-interest rates that vary from bill to bill. Treasury notes are different in aspects of the interest rate and duration of time, but the rates do vary from each note. More information on the rates of treasury bonds, notes, and bills can be found on Treasury Direct (www.treasurydirect.gov). At the time of writing this article, the minimum purchase price for bonds and notes is $100 each.
Rather than keeping money in a fireproof safe in your closet or keeping raw hard cash between your mattresses, how about letting that hard earned money work for you and have it make a little more cash. No harm in letting it make more money. Reinvesting earned interest with additional funding on the investment will also create more gains (something to keep in mind, or back pocket). Investing in financial securities can be fun, but also an educational experience of the financial market. Now, go forth and make great gains!
Calculate the time value of money invested