by Kathryn Hauer, CFP®, EA
You’ve heard the old adage “Time is money.” But is it? In so many ways, yes.
Interest, Distributions, and Returns Paid to You
One of the key ways that time means money is the earnings that you hope and plan for your money to yield. Very simply, the longer you contribute, the more you stand to make. Your money works for you when you earn interest on your savings. For example, if you save $50 per month under your mattress, at the end of 10 years you’ll have $6,000 and at the end of 40 years, you’ll have $24,000. If you are able to earn 5% compound interest on that money, you’d have $7,764 at the end of 10 years and $76,301 at the end of 40 years. Even without compounding, time works to increase your money without your lifting a finger.
Interest You Pay
Conversely, time is a killer financially when you are paying the interest rather than earning it. Credit card balances and other high interest debt are the worst culprits because “a credit card balance of $20,000 carried at an interest rate of 20% (compounded monthly) would result in total compound interest of $4,388 over one year or about $365 per month” (Investopedia). I realize that it’s unrealistic to expect a life without debt, but every month you can avoid high interest, non-asset-building debt lets you use time to your advantage in gaining a higher ultimate net worth.
Saving for Retirement
In addition to the money your investments can make for you, the amount you contribute early in your life has the opportunity to work longer for you. In your retirement account, you’re more likely to earn capital gains through your stocks and mutual funds than the compound interest described above, but those returns on investments fare better when you have years in which to earn them. In any given year, the stock market could return a negative amount (in 2008, market loss was about ~ 37%) or a positive amount, but over an extended period, experts agree that the stock market historically returns about 6%.
Getting a degree or certification takes time, but it pays off well over a much longer period after you graduate. For example, the following degrees are almost certain to increase your salary for many years after you invest the time needed to earn them:
CFP certification – 1 year
Associates degree – 2 years
Law degree – 3 years (plus prior education)
Bachelors degree – 4 years
PhD – 5 years
Night school degree – sometime 6+ years
Even if you shorten these accomplishments to the shortest period possible, you’re going to have to spend some time to earn them. The return on your investment for the time spent will be substantial, and if your company will pay for all or part of the tuition it’s even better.
Life in General
Many less-quantifiable areas of life support the conclusion that time affects money. In parenting, as much as quality time shapes your children, “quantity” time – the event of just being there a lot over their 18+ years of growing up – helps them. In sports, the best athletes spend a lot of time shooting baskets or bumping volleyballs to become great; there’s no way to speed up the muscle memory required to excel. Friendships – both romantic and platonic – can be made in minutes, but only time deepens the relationship to one of trust. These examples can’t necessarily be quantified in dollars, but productive children, money-making athletes, and helpful friends everywhere will corroborate that time is money in building these financial achievements.
Although time IS money, it’s hard to ascribe an exact dollar value to these examples of time. However, financial writers always try. Let’s do a simplified calculation of the ways time might affect selected parts of the finances of two hypothetical people who earn $60,000 per year throughout their careers.
You can use time to your advantage and be wealthier in the future if you:
Start saving early for retirement to let your money grow for the longest amount of time possible
Minimize your high-interest debt to reduce years of compound interest working against you
Take advantage of free or low-cost education offered to you because the time devoted to study pays off in the long run
Gain maximum benefits by spending sustained and consistent time on life activities like being a good partner, parent, expert, athlete, neighbor, or friend.
Kathryn Hauer, a Certified Financial Planner™, adjunct professor at Aiken Technical College, and financial literacy educator Learn more about ways to improve your financial health and at her website.