How to Build a Time Machine - Planning

One of the concepts mentioned in my previous blog “How to Build a Time Machine” was the importance of planning.  Provision for the unexpected is best made before the storm hits.  Preparing for the future is most effective if it is done in advance.  Planning is paramount because it is the only way we can take control of time.  Proper planning is like having a time machine.  Done well, it can erase mistakes or minimize the effect of surprises.

If your employer wanted to pay your salary all at once would you accept that payment arrangement?  Would your answer change if the payment was made at the end of the year?  As you contemplate your employer’s offer you must consider two things; the time you wait for the money and the amount of the money offered.  If the delayed payment is greater than the up-front payment, how much more is enough?  The concept is simple; a dollar today is better than a dollar tomorrow.  There is an inseparable connection between money and time. The concept is expressed in a formula as the Net Present Value.

The formula calculates the present value of a future some of money?  It involves three variables; the time the money is invested, the rate of interest, and the amount invested.

The amount of money and the interest rate are simple components. Time, however, is deceptively powerful.  The influence of time - the compounding that takes place over time - is profound.  The compounding effect trumps all other components.

For example, if you begin saving at age 25 with $1,000 to start and add $100 per month, your investment will grow to over $600,000 by the time you are 65 (10% interest rate).  The total amount you deposit will be $49,000.  The rest of your nest egg is accumulated through compound interest over time.  If you wait to start until you are 45 with $3,000 and add $300 per month, your investment will only grow to $235,000.  The total amount you deposit will be $75,000.  If the goal is to grow your money, the key is to have time on your side.

The time to start building your “Time Machine” is NOW.  The best time to plan for retirement is when you are 25.  The best time to prepare for a storm is when the sun is out and the sky is clear.  The best time to prepare for the unexpected is in times of certainty.

If you are out of time for the current crisis, then NOW is the time to begin preparations for the next surprise.