Minding the time value of money

Many people dream of becoming wealthy but only a few actually plan for it.

Wealth planning requires clear goals and a lot of discipline. To save up for a house, a child’s college education or a comfortable retirement, an individual needs to invest his income wisely.

Developing an investment plan is anchored on personal goals. An individual must estimate how much time he has to build his wealth and how much money he would actually need.

According to Citibank head of branch banking Patrick Cheng, the common mistakes individual investors make are:

* not knowing what you want;

* not having realistic expectations;

* not taking a long-term view;

* putting all your eggs in one basket;

* trying to play God; and

* taking a village mentality.

Inflation, or the increase in the prices of goods and services, eats into the value of the money we save. This makes investing a necessity, not a luxury, especially when interest rates on regular savings and time deposits are at an all-time low.

"Inflation erodes your purchasing power. Smart investing seeks to offset the effects of inflation," said Cheng.

But investing means having to deal with risk. Investment instruments such as stocks, bonds, mutual funds, educational plans and pension plans carry different levels of risk. In general, the greater the risk, the greater the reward potential; the lower the risk, the lower the returns are likely to be.

Long-term view

Investment products that give variable returns such as stocks and mutual funds present greater risk compared to those that give fixed or guaranteed returns like bonds and pension plans.

Investing with a long-term view normally reduces the impact of risk. "Investors benefit from the magic of compounding or growing the investment over time, without making any withdrawals. The longer you can keep your hands away from your money, the more your money will grow," Cheng said.

Investors should remember that the goal is not simply to beat inflation but to send someone through medical school or to retire independent of the well-meaning largesse of children and relatives.

Recognizing the time value of money also means investing systematically or putting a fixed amount each month or each quarter into your next egg. Hence, the total principal investment itself grows, instead of depending solely on the investment returns.

"Smart investors set aside money regularly to buy investment products. Investing regularly over the long term smoothens out market fluctuations," said Cheng.

And when is the time to start wealth planning, say, for a comfortable retirement?

"Regardless of how young or old you are, you need to think about retirement now. The longer you wait, the more it will take for you to arrive at your goal," said Cheng.

The traditional sources of retirement income, such as social security pension, may not generate the income one needs or wants. To reach the level of security he/she wants with ease, the individual must start investing wisely early in his/her career.

A 25-year-old who wants to retire at 50 will normally be able to tolerate more risk than a 40-year-old who wants to retire at the same age. Hence, a younger person’s opportunities for increasing his wealth can be substantially more than the opportunities appropriate for some who is doing his wealth planning much later in life.

Indeed, time is of the essence. Start minding the time value of your money before inflation erodes it. Plan to become wealthy and investment wisely now.