The Money Value of Time
The Money Value of Time
Maybe you should spend more money.
Author Jack Raines November 01, 2022
The Time Value of Money is a core principle of finance that shows us how much the value of an investment will change between two points in time given an expected annual return.
The time value of money plays a role in every branch of finance. Mortgages and car loans are amortized over time. 401k plans suggest estimated contributions needed for your portfolio to hit your retirement goals. Investors discount the future cash flows of companies to estimate their fair values, and companies discount the future cash flows of projects to determine if they are worth undertaking.
The time value of money is also the basis for most mainstream personal finance advice: spend less now to have exponentially more later.
Over time, this has led to a deluge of advice that vilifies whimsical spending and deifies stinginess.
"Don't buy your coffee from Starbucks!" screams an army of Dave Ramsey acolytes. "That $50 per month will cost you $221,575 in 40 years!"
"Pour every nonessential dollar into your index funds!" shouts the FIRE movement's loudest supports. "Every dollar spent now just pushes your retirement back further."
And over time, well-meaning advice such as "Spend less than you make" has been warped into "Never spend or else." And when you preach this long enough, people begin to believe it.
I, like most young people, grew up viewing money as this scarce asset that should be treasured and put away for safe keeping. Save every dollar, don't overspend on anything, you know the drill. Make sure everyone else in your Uber Venmo's you. Obsess over the cash in your checking account every week.
In hindsight, it was irrational for me to be worried about money. In college, I was an upper-middle class kid with a full scholarship. Realistically, I would land a relatively high paying job as a 22-year-old college graduate and be good-to-go.
But when frugality is portrayed as the sole important value in personal finance during your formative years, you tend to conform to this standard.
This mindset stuck with me after college into my first job. Better max out that 401k and watch your weekend spending! You know, the same stuff that every other 23-year-old thinks while working their first job.
Now, if you've followed me for a while, you know what happens next. It's a story that I've told a million times, but here we go again:
I made a bunch of money trading spacs during covid and then lost half of it but i still had enough money to just quit working for a year so i lived out of a backpack in europe and south america for a year because that seemed like the most logical decision for a 24 year old who had enough money that they didn't need to work for a year and now i'm writing this blog.
I've talked about this experience in several blog posts, and I have recounted the story on a dozen podcasts. Make money, lose money, travel, start writing, here we are today. What I haven't discussed is just how much this moment altered my perception of money.
As I mentioned above, we are trained to put frugality above all else from an early age, and it isn't until you reach the point where you no longer need to be frugal that you realize just how dangerous pure frugality is.
Most people don't reach this point until retirement, but thanks to my savvy ability to buy stocks that went up, I was able to briefly experience this sensation at 23. So today, I'm going to let you in on a little secret:
When you have enough money that you no longer have to be frugal, and you are staring at those numbers behind the dollar sign, you can only think one thing: now what?
Our careers are built around the idea of acquiring as much capital as possible, but it is only once you are finally done acquiring capital, and you are contemplating what to do next, that you realize an important truth:
You can't eat money, you can't breathe it, and you can't have sex with it. Money, on its own, can't entertain you. It can't make you laugh, cry, or smile. Money alone can't provide you with fond memories, and it will never set your soul on fire. You can't form a relationship with money (many have tried, but money never returns the love that it receives).
Money, in and of itself, is shockingly worthless.
However, money can be exchanged for something infinitely valuable: experiences.
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