A dollar today is worth more than a dollar tomorrow – the financial aspect of the time value of money.

Money today is worth more than it will be in the future in terms of what you can buy with it. In 1980, before you drove to the grocery store to buy a litre milk for 54 cents, you would complain about spending 32.07 cents per litre to fill up the tank of the car you had just purchased for $7,200.00. Today, milk costs an average of $1.45, you are more than happy to spend $1.30 per litre at the pump, and buying a new car will put a $31,352 dent in your bank account. You can largely thank inflation for this.

But inflation isn’t entirely to blame for rising costs nor does it explain why in 1985 the average home in Melbourne sold for $75,000, whereas today the median home price in the city has now risen to over $700,000. There are countless reasons why costs skyrocket with time, including popularity, world events, diminishing resources, natural phenomena, technology, etc. For example, milk prices change with supply, demand and commercial relationships between farmers and retailers, whilst fuel prices change with the global economic climate and the country’s tax system.

Aside from stronger buying power, the higher value of money “now” can be further illustrated by how it can be “used” today to grow. Consider what would happen if you put a dollar in a time capsule versus putting a dollar in a typical interest-earning bank account. In 30 years, the bill in the time capsule may look pristine, but it will be worth exactly one dollar (which we’ve already shown might be enough to buy a stick of gum in the future), whereas the dollar you put in the bank will have more than doubled. This is a simple example of the magic of compounding interest, however, you can just as easily turn today’s dollars into something substantially more valuable by paying down debt, investing in a business, or buying a property.

Waiting to receive some pre-determined amount of rent from your cell site lease in ten, twenty, or even thirty years into the future is the equivalent of waiting for a sealed time capsule of money to open up. Just think, what will your rent be “worth” then? How much buying power and how many investment opportunities will slip through your fingers as the years go by?

Now, what would you do if you could unlock your time capsule today? What is the opportunity cost of receiving large capital now compared with relying on smaller capital from a third party?

A dollar today is worth more than a dollar tomorrow – the financial aspect of the time value of money. was last updated December 10th, 2015 by APWireless AU
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