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Finance 101: Time Value of Money – the More Time the More Money

Financial planningOn your journey to building wealth you need to understand the time value of money, better known as interest. You are aware that when you borrow money in the form of a loan or from your credit card you pay back more than you took. This is called interest. This makes up for the loss of use of that money for the lender. Why do you need to make up for the time? Because as time goes on the same amount of money buys less due to inflation. For example, $100,000 today can buy a 1200sqft house, but one year from now that same $100,000 will only be able to buy a 1000sqft house. The same amount of money is worth less in the future.

When your bank gives you a 30 year mortgage they need to recoup the loan amount plus the interest (the amount of money that makes them equal to today) so that they can buy the same amount of goods 30 years from now as they could today. This concept is important to understand as you build wealth so that you can limit the amount of interest you pay. The higher your credit score the lower your interest rate because the lender believes you are less of a risk.

This is a very simple and straightforward money concept. Remember this works in reverse. If you lend money to someone or as an investment in a business you can charge interest. As you become a New Black Chick use this concept to be picky about your credit cards and loans and go for low interest rates. As you look for new streams of income, you have the right to charge interest  – a reasonable amount. Don’t become a loan shark 🙂

 

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