Time Value of Money

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I don’t have any time and I don’t have any money.

You think that but it’s not entirely true.

At your job you are trading your time for a paycheck.

We will go over how you can start with little but consistent amounts and end up with a pile of cash.

One basic finance theory is that getting money today is worth more than receiving that same amount in the future.

This ends up being true for a couple of reasons.

The first is inflation.


The average rate of inflation over the last 30 years is 3%.

Let’s say you have a choice. You get $100 today or $100 in a year.

Due to inflation your $100 now is worth $97 next year in regards to how far your money will go when you spend it.

The second reason is if you get $100 today you can invest it for a year.

The average stock market return is 7% so if you take your $100 today it is worth $104 in a year versus the $97 if you had waited.

Take that same $100 now from the example and wait 2 years instead of one.

Your $100 today could be worth $108.16 in 2 years but earning $100 two years from now is only worth $94.09 in today’s dollars.

That’s a swing of $14.07.

This is why saving money today to invest is so important.

These theories are great and all but are worthless unless you take action.

“The best time to plant a tree is twenty years ago. The second best time is now.”

Chinese Proverb

Time Value of Money: Applications

You have probably come across blogs that advocate saving as much money as possible.

Much much more than the conventional10% the financial talking heads on TV tell you.

Mr. Money Mustache explains in his post about the math behind financial independence if you live on a certain percentage of your income, how long you would have to work in order to be financially free and live at that same income level.

AKA if you make $100,000 and live on $50,000 how much you need to save to have that $50,000 through investments every year to live on for the rest of your life.

The strategy works because if you save and invest today eventually your money will make you enough profit to live on.

There are two sides to the coin though.

Is Saving Enough?

The extreme methods to live on less than half your income are to either cut half your costs or to leave your expenses the same and double your income.

It’s easier to make big changes and save money, especially if you’re young and don’t have a family to support.

You can move to a cheaper apartment, eat ramen, tuna, Mac and cheese, turn off your breaker when you go to work to save on the electric bill.

If you have a family, though they might not appreciate all of these money saving tips.

You know there’s a limit on how much your spouse is willing to deal with to save money.

You can move to a cheaper home but you also don’t want to sacrifice your safety or your child’s education by moving out of a good school district.

Lottery example

Let’s go through another example to illustrate the time value of money.

After taxes you are living on $40,000 per year.

We’re also going to pretend that you won the lottery and after taxes you have $1 million.

If you invest all your winnings and withdraw $40,000 every year to live on, you wouldn’t run out of money.

You would be able to do whatever you want with your time and still have the same amount of money to live on just from the interest.

Withdrawing $40,000 every year equals just 4% of $1 million. 

 But if you achieve this lifestyle by purely cutting costs and you hit your financial independence number all of a sudden you don’t have any room in your budget to increase your quality of living.

Try to earn more and take advantage of opportunities in addition to cutting costs.

If you raise your income by 50% you only have to decrease your spending by 25% instead of cutting costs in half.

Using the time value of money you can figure out how much your money today is worth in the future.

You should also think about how much your time is worth.

Time Value of Time

If money is worth more today than it is tomorrow because we can put our money to work is your time today also worth more today than it is in the future?

An hour today is worth more than an hour in the future.

You can choose to believe this or not.

Time is the only thing we can’t get back.

But a single year when you are 20 equals 5% of your life. 

One year when you are 50 equals 2% of your life.

Would you rather take the time to travel when you’re in your 20s or 70s?

Have you noticed that every year you get older and time seems to pass a little bit quicker?

You may think that you need to be better prepared to start investing, start that side hustle or even start really looking at your budget.

Take the information from this site and others and put it to use.

You will end up making some mistakes.

But some things will end up being a lot easier than you expected.

With current apps things like figuring out your net worth, creating a simple budget or beginning to invest your money are all relatively simple. 

Each thing will only take a few minutes of your time and will help you get on the path to living the life you want to live.

Money Value of Time

There is basically unlimited money to be made in the world.

There are only so many minutes in a day and days in a person’s life.

You can put an amount on how much money your time is worth by figuring out your hourly rate of pay.

If you’re making $15 an hour, one hour of your time is worth $15.

Now think about it the other way around.

How much are you willing to work for an extra $20? An extra $100?

This answer is different for everyone.

You might think you would put in an hour’s worth of hard labor for $100. Most people wish they could be paid $100 an hour at their job.

What you can do TODAY

If you have textbooks, handbags, or other collectibles in your closet getting dusty you could spend an hour to take pictures and put up an ad online to sell them and make your hundred bucks.

Chances are you won’t.

Hopefully you have some motivation to selling your books today.

You’ve already learned that making that money today and investing it is worth more than waiting and doing it in the future.

Add that to the fact that your textbooks might be going down in value each year as they get more outdated.

If you have a normal job you are very familiar with the concept of trading your time for money.

One way to get some of your time back is to trade money for time.

Ask yourself how much are you willing to spend to save yourself an extra hour’s worth of work?

In your business or side hustle, how much would you pay to not have to process returns or deal with customer service phone calls anymore?

If you’re interested in learning how to get some of your time back by making money while you sleep, check out these 5 types of passive income.

Outsourcing Definition

Outsourcing is hiring someone else to do things for you.

Why outsource when you can do it yourself?

The saying goes, if you want something done right, you gotta do it yourself.

Well, not if it’s accounting and I suck at math.

Or if I need to redo my bathroom and I don’t know anything about plumbing or laying tile.

If it’s an easy enough fix, sure you do it yourself.

If your tub is leaking and you’re worried it’s a leaky pipe, it might be a good idea to leave it to a professional.

Then again, if you’d rather not do an easier task like unclog your drain and instead use the extra time to play with your kids, it might be money well spent.

Personal Outsourcing

Think about what you would do with your free time if all you had to do to clean in the weekend was tidy up a bit and maybe a load of laundry (you can outsource that too!)

Make outsourcing parts of your personal life a priority by including them in your budget.

You can hire a nanny to help watch your children so you and your spouse can work. 

Or hire a babysitter to take your spouse out on a date. 

You can also hire a dog walker or a pet sitter if you have pets that need to be cared for during the day.

You can schedule someone to clean your home once a week or a couple times a month so you can spend your weekends relaxing with your family instead of mopping, cleaning the toilets, tubs and sinks.

Business owners are often called job creators.

Become a job creator in your own home.

If you hire a virtual assistant to handle all the events on your family calendar, how much time and stress would that take off your plate?

How much is that worth to you?

One simple way to hire someone to do a simple task, like put together the IKEA furniture, is to hire someone through an app like FIVERR.

If you have kids you can also hire them to do chores.

Teach them now about responsibilities and working hard for their paycheck.

And then really teach them a life lesson and keep half their money as “taxes” and secretly invest it for them.

Business Outsourcing

Business owners outsource tasks they don’t want to do, don’t have the expertise in, or don’t have the time to handle themselves.

That’s how many of us got our normal jobs.

An owner can manage employee schedules, make sure office supplies are fully stocked, manage the books and provide customer service.

Or they can hire a person or two to handle all that for them while they focus on bringing in more business.

As a business owner you can also outsource through hiring consultants, virtual assistants, and freelancers.

Henry Ford, one of the greatest entrepreneurs in history didn’t know the details about how cars worked.

But he knew about the manufacturing process and outsourced the jobs he didn’t know how to do himself.

Business owners often outsource in order to focus their time on things that are more productive to the company.

It wouldn’t matter how good Ford’s employees are at putting together cars if he couldn’t sell them to the public.

And if he would have waited to start his business someone else could’ve come along and popularized the automobile.

Wrapping up

The time value of money is the idea that money today is worth more than that same amount of money in the future.

If you would like to learn about how to put your money to work for you check out my article on stock market basics

Be ready to learn from your mistakes and know that you will never be completely ready to jump in.

The hardest part is to take the initial plunge and get started on taking control of your finances to design a life for yourself that you want to live.

Money is a useful tool, it’s great to have, but without any action it’s pretty worthless.

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