Time Is Money

Posted By: Dr. Frugal in Saving on 06/11/2007 at 10:34:40

The saying time is money is such a cliché that you probably think nothing of it anymore. It's true though: there's a reason it's so ubiquitous. The time value of money is based on the concept that the dollar you earn today is more valuable than the dollar you WOULD earn later because you could invest it and earn interest. If I agreed to pay $1,000 ten years from now, or some significantly smaller portion today, you could easily figure out the amount you'd need to receive today to equal the value of $1,000 ten years down the road. You would calculate this by discounting the amount using current interest rates. If the current interest rate is 8% you might be willing to take even $400 rather than waiting because you're confident that investing that money at 8% would yield more than $1,000 over a ten year period.

Assuming interest is a non-factor, the lesson to really take from this is that a dollar today is way better than a dollar tomorrow. Conversely, paying things off in lump-sums is better choice than install plans as the savings you could take can be re-invested for your own personal profit.

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