Time Value of Money
Simply put,
if I offer you a choice of:
having $100 today vs $100 one year later, you would obviously choose to have the $100 dollars today.
I realise the obviousness of the choice too subsequently and decide to raise the offer for the ‘one year later’ option. I revise the offer to:
having $100 today vs $101 one year later. You may still choose to have the $100 dollars today.
So, I revise again. Next offer:
$100 today vs $102 dollar one year later. You may still prefer instant gratification.
So, I keep revising my offer, till you finally see value in accepting a higher amount one year later than $100 today. Let’s say, you agree to accept $107 one year later, rather than $100 today.
This, in a nutshell, is Time Value of Money. Money has an earning potential over time. Hence, if you have x units of money today. In future (in time t), the money should grow to pxt, where p is the earning potential.
The Time Value of Money is not very intuitive at times and you tend to make sub-par decisions. It helps to know when to spend/invest your money upfront and when to stagger the payment/investment.
Some real life illustrations:
- Money making money for you: If you have $100 today and you invest it in an asset that has earning potential which is higher than the rate of inflation, then, you can be richer in a future period of time. Here’s the thing: If you can restrain your urge for instant gratification, then you money can make money for you.
- Subscribing services: If you are subscribing for a service which gives you x% discount if you make a 5 year upfront payment, rather than a 1 year…you’re probably better off taking the smaller horizon subscription, save your 4 year subscription and invest it (may be in the shares of the company itself, providing the service) and make much more than x% that you would have saved. Here’s the thing: Don’t block your money for longer period contracts for puny discounts. The money has the potential to make much more.
- Costly Consumer Loans: If you have the money, buy the new phone/TV/Car with outright payment rather than on loan. This is because the earning potential of your money is most likely lower than the interest charged on the consumer loan. Here’s the thing: Buy that fancy mobile/TV/Car only when you can buy it with upfront payment.
- Cheap housing loans: Even if you have the money, it may make sense to buy the new home on loan, because home loans are some of the cheapest & longest form of loans. Chances are that over such long periods, your money will have the earning potential far superior to the home loan rate. Here’s the thing: a loan that charges less than an asset and asks for repayments after the asset maturity/payments is a good loan.
Money Value of Time
Simply put, time is a limited and irreversible resource. The most fundamental law of economics is that if resources are limited, one must prioritise the usage of such resources. One way to view time from this perspective is that you should attach a money value to pick one activity over the other.
This looks very simple & obvious, but it isn’t so.
Some real life illustrations:
- Living Intentionally: Wake up from your dream, get out of bed, brush your teeth..go to office wishing if your dream come real and you don’t have to drag your feet to something you don’t enjoy…check emails…have a tea..check emails..gossip at water cooler..check emails..have a tea with friend discussing your real life dream..return home…watch Big Boss..dinner..go to sleep…find that the dreams are still dreams! We live a life of mindless drudgery…hoping (just hoping) of some improvement, but not really doing anything about it. We tend to squander our precious time on insignificant routines & poor money choices like watching Big Boss and water cooler gossips, and keep indulging in Ego Syntonic Satisficing – making easy decisions that support our esteem, justifying not living deliberately and taking action. Here’s the thing: Always live deliberately & intentionally…even relaxation has to be part of the intention.
- Penny wise Pound Foolish: We often spend time on activities with the intention of saving money, not realising that the time we spent on saving the pennies was worth pounds, if utilised elsewhere. In the pre-Amazon days, I remember, a lot of people in Mumbai suburbs would spend their entire day going all the way to Crawford Market at the other end of the city to fetch some bargain buys. A few weeks back, my neighbour chose to spend half a day going to the other end of the city to her husband’s office to take a Covid vaccine. Why? Because it saved her Rs.780. She could have taken a jab 15 days earlier in a cozy nook of our clubhouse at a ‘vaccine’ throwing distance. Here’s the thing: All low value activities that can be outsourced must be outsourced; all low value bargains that trade off time for puny money, must be avoided.
- Social Service – I concede upfront that there’s a lot of satisfaction that one derives from doing social service and helping the less privileged. Sometimes, it helps to stretch an idea to its extremes – highest, largest etc. I’ll take the example of the richest person in India, Mukesh Ambani – Is Mukesh Ambani, better off spending a week doing social service personally, helping the poor, serving them clothes and food…or is he better off doing what he does best – creating wealth, and diverting some of it to the same cause? He can hire 100s, if not thousands, to carry out the same social service on his behalf. Now, none of us is as rich as he is (logical conclusion from the fact that he’s the richest in India!), but, at least I’m better off doing what I do with full intensity and sharing the fruits with the less privileged through a charity foundation. Here’s the thing: You can give far more valuable social service by carrying on what you’re good at and adding value to society and to yourself, and sharing back some of your value with the society.
TiMoney
Time and money, from the perspective discussed, are different manifestations of the same thing. There is a fundamental interchangeability between the two. Time has money value and money has time value. These two different dimensions segue into one – TiMoney. One should be smart enough to recognise this fungibility and make smart decisions.
P.S.: There is no real word like TiMoney. It is a figment of my imagination…but the fungibility is real!