Time Value of Money

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Time Value of Money

talessi@ariesfoundation.org

The Opportunity Cost of Money

TIME VALUE OF MONEY

For most of us this tends to cause our eyes to glaze over whenever someone starts to go into the details around this subject. It breaks down into 2 parts;

PART A - The money you have today is worth than the money you have tomorrow. When we are talking about buying power, because inflation increases the prices (cost to us) of stuff in the future. So your doillar buys more in the present time than it will in the future. And that is unfortunate for all of us. So we need to take steps to make sure, or at least try to preserve, that our spending power is the same tomorrow as it is today. It is why the funds you have in the bank are actually losing money. Not for today, but since the interest it is earning is not keeping up with inflation, then those dollars will be buying less for you in the future.

PART B - Is where the compunding of interest (the plus side of the ledger for us) comes into play. Or making our money work For Us (not against - see bank interest above), so that our buying will not only be maintained, but possibly increased in the future. Of course, some of this growth involves RISK. It is far more important to understand how much you are willing to risk in an investment then how much of a RETURN you might achieve. Each factor must be carefully considered against the other.

OPPORTUNITY COSTS

OK, so this one sounds a little "heady", but really the focus is about the choices we make when we spend. Opportunity cost is defined as the cost of pursuing one alternative versus another. For example, if you were going to spend $800 to upgrade your cellphone, the opportunity cost would be that you would not be able to buy anything else with or invest that $800. It's the differnce between the cost and the benefit of each decision you make. In this case, you could spend $800 on a new phone or you could invest the same $800 and try to grow the funds. In 5 years, the phone may be worth $100 and the $800 investment could be worth $1100 (at a 6% rate of return). The opportunity cost of buying the phone is the long-term benefit that you will receive if you did not buy the phone and invested it. Technically, the opportunity cost is not limited to the cost of investing the money, but also includes any other opportunity you could spend the money on (investing, buying something else, saving the money, etc). By carefully evaluating your alternatives and by weighing the opportunity cost of each decision, you can vastly increase your long-term wealth.

IT'S ALL ABOUT BALANCE

Being able to live your life today, but also saving, so you can enjoy your life later on as well. Trading off between wanting Growth(return) versus how much I am willing to lose (risk). Understanding how the dollars that I spend today will impact and offset my ability to purchase tomorrow.

GOT QUESTIONS? ASK US. WE CAN HELP WITH THAT!

Join us tomorrow night for our weekly THIRSTY for knowledge THURSDAY where will go over different ideas and actions steps that you can take to help you be more balanced as you try to achieve a better relationship with your money.

Visit www.ariesfoundation.org/events to learn more

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