Money and time, a combination not many people are thinking about. A few years ago I was re-introduced to the concept of “Time value of money” , simplified meaning the future impact on your life of every financial decision you make.
I knew it was a thing in economics and finance because I learned about it in school. But that just stated the definition and the calculations that go with it.
Not the concept , the philosophy behind it. Not just the numbers but the way you make choices based on the wrong perception of the “Time value of money”.
First the dry calculus behind it. And I will make this really simply and boring so anybody can understand this. Let’s say you have 1000 Euro, dollar or whatever currency , you can spent it on the coolest new jacket. Or invest it it with a yearly return of 3% , not much but it’s safe and you will keep your 1000 no matter what. In 30 years with compounded interest the initial 1000 will amount to about 2400 and change if I calculated this correctly but it’s close. So just making the decision not to spent but save/invest will return 2427,26 in time.
What about inflation, that’s true but doesn’t matter for now it’s the concept and mindset I am trying to illustrate. There are more and better investment options as well. Moving on.
Not buying the latest whatever will make you richer financially. It also shows the power of an integral part of investing , compounding returns over time , interest, dividends etc.
By simply stopping and asking the question, is the investment in this jacket worth the loss of future returns? Do I really need this jacket ? And is there a better alternative, say spend 250 on a jacket and save 750. You can buy more jackets during that 30 years from the compounding alone. Interesting, but hardly on anyone’s mind.
So what does this mean. Every financial turn you take will affect your future options in life. Over time compounding will make you wealthier in money and in time.
Wait richer in time. Yes , time. Time is an uncertain factor, and a lot of people are only considering money when making financial decisions. Nobody’s asks ‘How much time will it take me to earn the money needed to buy the jacket?’
Again simply calculus, you make 65 Euro an hour (which is a very good) , meaning you will have to work about 15 hours just to buy that 1000 dollar jacket. So by saving this money the amount of time your need to work in the future becomes shorter. Even with the evil inflation over time. Let’s substitute this for a house to make it more acceptable. Let’s say you can buy a house of 200000 Euro with a mortgage of that amount, or one which has the same features but is slightly smaller and cheaper, let’s say 175000. You will have to pay this off in 30 years. Not taking the burden of interest into account and the same hourly income that 25000 difference will make that you have to work about 384 hours in the future. So your ‘retirement’ just got 384 hours shorter. Taking interest into account you will have to work even more hours to pay this debt off.
I deliberately simplified the calculus just to show the concept. So the questions you should ask yourself are , does this purchase add value to my life and what is the cost in time for this purchase, time value of money.
A lot of people are complaining they are way too busy, maybe it’s the new norm to be busy. One of the main reasons behind it is financial pressure, we have to make X amount of money each month just to pay off all sorts of debt and buy all sorts of stuff to use in the limited amount of free time left at the end of each week.
I don’t know that many people who are over the moon about their job and rave about the cool stuff they are doing. Most people are passionate about hobby’s , volunteer work, sports etc. Stuff other than the thing they spend doing most of their lives.
The people I do know who love their work and get a lot of value out of it have followed their passion, and have success. But this is not attainable for everyone.
If only I had more time to do X, Y or Z. It’s a frequent remark. It’s all too familiar for most of us. But by taking the value of time into consideration a lot of financial decision making will become decisions on life.
How to go about this ?
First starting point is figuring out what you really want out of life, and start asking the right questions. I have always wanted to….
Make the list , get that list in the right order. Finally attach a sum of money to it. And a time frame. See how much time it will take you to get there and then do it.
It’s that simply and hard at the same time. Making choices always is, but without choices you will be bound to a life that’s never really yours.