Investors having the opportunity to receive $100K today or receive it next month with an expected 5% return will take it now because they can do more with it now than they can do next month.
Retired people do not have the same lifestyle they had before their retirement. It is not because they did not save enough money; but because prices of goods and services change cumulatively as their savings face the harsh reality of a financial concept called Time Value of Money.
Hello, I am Dr. Bobb Rousseau and this is Apostrophe Podcast. Today’s episode discusses the Time Value of money. More importantly, it shows how $100K spent or invested today is worth more today than when spent or invested in the future.
Investors having the opportunity to receive $100K today or receive it next month with an expected 5% return will take it now because they can do more with it now than they can do next month. Moreover, having the opportunity to invest that money today with an expected return of 10% next week or invest it next week with an expected return of 15% over the following week, entrepreneurs will invest today because the opportunity cost of waiting is too high.
Suppose you have two options to claim $100,000: Take the lump sum today or put it in a 3% interest bearing savings account for two years. Before making financial decisions, investors evaluate the opportunity costs or the cost of waiting. Opportunity cost posits that the best time to invest or spend money is today because money is worth more now than it will be in the future.
If you chose option 1, $100K today is worth $100K. If you select option two, with a supposed inflation rate of 3% each year, in 2025, you will need $106K to have the lifestyle you could have had today if you had selected option 1. Since your bank would add $3,000 to your $100K in 2025, you will have to come up with $3,090 to beat or adjust to the 6% inflation rate.
Inflation rates will continue to decrease the value of your $100K and therefore, will impact your buying power. By the end of the year, your $100K will be worth $97,000, $95,000 in 2024, and $92,000 in 2025.
To ensure the money on your savings beats inflation, consider increasing your yearly deposits by the current inflation rate. For example, if this year, you save $2500, next year, add $75 more to your savings if the inflation rate is 3%. The higher the inflation rate; the more you should save to be able to keep your current lifestyle.
In summary, I discussed the Time Value of Money concept. The Time Value of Money concept states that money is worth more today than in the future due to inflation. I then ask whether it is better to take the $100,000 today or open a savings account with it for two years with a 3% APR. Taking the money now is the better option due to the opportunity cost of waiting and the fact that money loses value over time due to inflation. To beat inflation, people should increase their deposits yearly by the current inflation rate.
Bobb Rousseau, PhD
Apostrophe Podcast
Hello, I am Dr. Bobb Rousseau and this is Apostrophe Podcast. Today’s episode discusses the Time Value of money. More importantly, it shows how $100K spent or invested today is worth more today than when spent or invested in the future.
Investors having the opportunity to receive $100K today or receive it next month with an expected 5% return will take it now because they can do more with it now than they can do next month. Moreover, having the opportunity to invest that money today with an expected return of 10% next week or invest it next week with an expected return of 15% over the following week, entrepreneurs will invest today because the opportunity cost of waiting is too high.
Suppose you have two options to claim $100,000: Take the lump sum today or put it in a 3% interest bearing savings account for two years. Before making financial decisions, investors evaluate the opportunity costs or the cost of waiting. Opportunity cost posits that the best time to invest or spend money is today because money is worth more now than it will be in the future.
If you chose option 1, $100K today is worth $100K. If you select option two, with a supposed inflation rate of 3% each year, in 2025, you will need $106K to have the lifestyle you could have had today if you had selected option 1. Since your bank would add $3,000 to your $100K in 2025, you will have to come up with $3,090 to beat or adjust to the 6% inflation rate.
Inflation rates will continue to decrease the value of your $100K and therefore, will impact your buying power. By the end of the year, your $100K will be worth $97,000, $95,000 in 2024, and $92,000 in 2025.
To ensure the money on your savings beats inflation, consider increasing your yearly deposits by the current inflation rate. For example, if this year, you save $2500, next year, add $75 more to your savings if the inflation rate is 3%. The higher the inflation rate; the more you should save to be able to keep your current lifestyle.
In summary, I discussed the Time Value of Money concept. The Time Value of Money concept states that money is worth more today than in the future due to inflation. I then ask whether it is better to take the $100,000 today or open a savings account with it for two years with a 3% APR. Taking the money now is the better option due to the opportunity cost of waiting and the fact that money loses value over time due to inflation. To beat inflation, people should increase their deposits yearly by the current inflation rate.
Bobb Rousseau, PhD
Apostrophe Podcast