I’m certain you already know what I mean when I say, “Time is money.” You know that your time is valuable, but is it really a commodity like money? Is it actually anything like the coins and bills in your pocket?
You probably know how your wage is easily understood as time and money together. You trade, for instance, 1 hour for RM100, making a 5-hour job worth RM500. That’s not so hard to understand.
So let’s take this further. In the finance world, there is an idea called the “time value of money.” The sooner you can receive a payment, the more valuable it is. RM100 today is worth more than RM100 in 3 months’ time.
This is mostly due to your ability to use that RM100 now to earn more for you.
So, let’s go even further with this concept. What is the equivalent value in the future?
To answer that, let me first ask you a question. Pretend that you can either get RM1,000 today or RM1,075 in 12 months. Which should you choose? This gives you an insight into future value. The amount you receive today is weighed against how much you can reasonably earn with interest compared to the same amount in the future.
A lot of this depends on your ability to grow that money. If you think you can expect a 10% increase from interest, you’d be RM25 better off taking the money now and growing it with interest than if you waited for RM1,075.
However, say that the best you know how to grow this RM1,000 is by putting it into a Fixed Deposit account and earn a 4% interest per annum. Then, you are better off taking the RM1,075 in 12 months because at 4% interest, you would only take home a total of RM1,040.
Future value also works in reverse. Pretend that you want to lease a car, but those monthly payments bother you. Your car dealer might tally up all the payments into a lump sum and ask you to pay it off all at once, saving you the hassle of a monthly payment.
This is a bad idea because a pre-determined interest rate has already been worked into the monthly payments. A better option for you would be to negotiate a cut rate for the lump sum.
That is an example of “present value.”
Each term is related by time:
Time value. The money you have in your hand NOW is worth more than the same amount of money you’ll get in the future. Grasp this concept, because it’s basic to all financial understanding.
Future value. The future value is how much you can EXPECT to make with the money you have now. It is entirely dependent on your ability and sense as to how much future value you can create. Use interest rates and time period to help you figure out future value.
Present value. The present value is how much it COSTS NOW to forego an expected payment in the future. Again, the present value is determined by interest rates and time.
The phrase, “Time is money” is actually the key to a deeper understanding of your own money. Grasp these concepts, understand how to make them work for you, and you will soon have a better way of thinking about the cash in your hand. It is power, and it can magnify over time if you work it well.
Hope this has helped you. Share it! Someone might benefit from this article. Have a great day!