The time value of Money

 

One of the things I love to do, and invariably envisage when engaging others, is "adding value."
Interacting in ways that make a difference, have meaning and add value is what I consider key aspects of my life's work. Hopefully, a life well lived.

But what is value?
Value is basically the usefulness, worth or importance of something.

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Lately, I have been thinking a lot about value, and how it is related to both time and money.
Thing is, life in the modern world revolves around making and then spending money. In some cases, there's a bit of managing money in between making and spending it.

And since money is a store of value, many of us have got to a point where we value nearly everything in terms of money. Only that it isn't entirely possible. But that's beside the point.

My focus today is the time value of money.

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There are several ways of looking at this:

The first one, and the easiest and most useful way is how a single human being who only has 24 hours in a day, can get so many things done within that same time that s/he isn't able to do alone.

How this is done is by using the time resource of others. And this is what is at the core of employment, where one commits his or her time (in addition to other resources such as skills and effort) and in return, gets compensated/renumerated (wages or more commonly, salary).
In this way, labor becomes a key factor of production which can be multiplied many times over through addition of people. The sum total of this is measured as man-hours.

A second one is the effect passage of time has on the value of money. And I'll give an example:
About a dozen years ago, I contracted someone to make for me several windows and doors. I have so far used six of those windows in the house I currently occupy. Four windows still remain in storage, and will likely be used to build a new house.

Earlier this year, I decided I needed two new windows in a smaller size than what I already have in storage. Upon enquiry, I realized that those smaller windows now cost more than twice what I paid in 2010. And worse, the metal used to make such windows these days is of a lighter gauge (poorer quality).
In short, the amount of money I used acquiring those ten windows a dozen years ago is not enough to buy five windows today.

The economic term for this is inflation. That over time, money loses value. It is for this reason that storing money in the bank in a savings account or under the mattress in the form of notes and coins is a very bad idea.
Most of the things money can buy today, the same amount of cash cannot buy in the future.

But there is yet another way of looking at this.

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Using the same example of my windows in storage, they haven't changed one bit and can still be used to build a house. The same goes for any construction material e.g. sand, ballast, stones that does not degrade over time. Cement is obviously an exception, since it contains active ingredients whose viability is only guaranteed for about 90 days... I digress.

The point here is that buying construction materials or storing money in terms of items that do not degrade is not an end in and of itself. Stagnation is no value addition.
Suppose what I did was build a house that then got occupied by tenants. Or a shop from which I would be selling things at a profit. Or a store that I would be leasing out...

There is an opportunity cost arising from merely storing items of value without putting them to good use. Gainful use. In other words, the time value of money is increased significantly when things acquired using money are in turn used to make more money.

Using the analogy of an airplane in the sky, it not only takes having a pilot in the cockpit to fly that plane. The pilot has to be doing the right things for that plane to fly.

So, with the time - which cannot be stored nor recovered once it passes - we each have each day, are you merely storing value, or actively adding value?

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Having a brand new computer is no guarantee for a bright future in sales. One has to seize the day, starting today. At least we have a much easier time in that we can linearly and serially plan our time unlike Dr Manhattan for whom everything happens right now!