The Time Value of Money is a simple concept—but it’s the bedrock of smart personal finance and long-term investing. It states:

Money today can purchase more goods and services than the same nominal dollar amount in the future ($1,000 in the year 2025 is more valuable than $1,000 in 2050).
Money you have today can be invested to increase its value in the future.

We are going to focus on the second point. When we first introduce the Time Value of Money to new investors, our explanation is usually accompanied by a chart like the one you can see below.

This chart illustrates the power of compound growth when money is invested consistently over a long period of time. In this scenario, at the age of sixty-five, our “Consistent Saver” has a portfolio of $1.509 million after contributing $7,000 to their investments each year since they were twenty-five. They were helped along the way by a 7% rate of return on those investments each year. This is a simple way to illustrate how delayed gratification (not spending money in the present) can lead to wealth in the future.

Now, let’s dig a little deeper and examine the components of that $1.509 million. The chart below shows the growth of $1 from the year it was contributed until retirement. So, $1 contributed at age twenty-five has forty-one years to grow while $1 at age forty-five only has twenty-one years to grow. I don’t think anyone is surprised that $1 invested for a longer period of time has a bigger value than $1 invested for a shorter period, but the scale of the difference never ceases to amaze me. The $1 invested at age twenty-five has grown to $14.97 — a figure that reflects the exponential impact of compounding at a 7% annual return over forty-one years — while the $1 invested at age forty-five has grown to $3.87.

This means that the biggest long-term gains in the portfolio are derived from the first dollars contributed. So much so, that at the age of 65, $459,873 of the $1,509,604 portfolio can be attributed to the first five years of contributions at $7,000 per year. It still blows my mind to see how much someone’s wealth can be influenced by time in the market.

Case Studies

The most important part of any discussion on the Time Value of Money is turning the concept into practical takeaways. Traditionally, the most common takeaway is the later you start investing, the more you’ll have to contribute each year to start retirement with a given portfolio value.

For example, in the chart below, our Consistent Saver (green line) starts contributing $7,000 per year from age twenty-five to sixty-five into their retirement account. With a 7% annual return they have a portfolio of $1.509 million at age sixty-five. The Late Saver (purple line) starts contributing to their retirement account at age forty, but in order to have a retirement account between $1.5 and $1.6 million by age sixty-five, they must contribute $23,000 each year, more than triple the annual contribution of the Consistent Saver.

Now, let’s broaden the scope a bit and explore how different scenarios might unfold if each investor aims to retire with $1.5 to $1.6 million. A lot of people like including grandkids in their wills with the idea that the money the grandchild inherits will help the grandchild in some capacity. However, I think the Time Value of Money shows that if you already have a generous spirit and the means to contribute, the best time to make a gift is today.

In the above chart, we have an orange line titled Gift + Low Saver. Our investor has a generous grandparent who contributes $19,000 per year (2025 annual gift tax exclusion amount) from the age of twenty-five to twenty-nine, then stops. This grandparent knows their grandchild is responsible but unlikely to have a high-earning career. At age thirty, the grandchild starts making their own contributions of $2,000 per year from age thirty to age sixty-five. The grandchild is never able to meet the contribution amount of $7,000 per year and certainly not $23,000 per year, but the $95,000 in contributions for the first five years still allows them to start retirement with a portfolio balance of $1.566 million.

Finally, we get to our last investor. Bonus/Unexpected Windfall (blue line) somehow receives $100,000 at the age of twenty-five. It could be from being a beneficiary on a distant relative’s life insurance policy, they became a realtor in 2021 and had a breakout year, their YouTube channel went viral, etc. The point is they have $100,000 that they weren’t expecting, and they don’t know what to do with it. Well, if they determine they need $1.5 to $1.6 million in retirement and believe an annualized 7% return is attainable, they could simply invest the $100,000 and never contribute to their investment account again. In contrast to our other investors who are making consistent contributions for some period of time, our windfall investor simply needs to invest their $100,000 at age twenty-five to be slightly better off than our other investors at age sixty-five. The windfall investor starts retirement with $1.602 million.

So, here are a few valuable takeaways from this Time Value of Money Exercise.

Legacy & Gifts: If you want to make a monetary difference in someone’s life and have the means to do so, it might be better to make a gift sooner rather than later. Not only can you improve someone’s financial well-being and get to be around to witness its influence on the recipient’s life, but it also offers a great opportunity to educate the recipient about your philosophy around money and your intent for the gift.
Windfalls & Early Careers: Some people earn significantly more early in life and decline to a more normal income stream as time goes on (professional athletes, entertainers, influencers, etc). Others may enter a sales job at just the right time or unexpectedly inherit money. The Time Value of Money shows that if these “excess” funds are invested over a long period of time, they can reduce or eliminate the need for additional contributions throughout one’s life.
Life Cycle of Investing: In most Time Value of Money articles there is an implicit battle between the Consistent Saver and the Late Saver. The truth is that most successful retirees start out as little savers and increase their contributions as their income grows and expenses decline through debt being paid off and children moving out of the house.

There are many paths to a successful retirement, and understanding the Time Value of Money can help you walk yours with confidence.