A Dollar Today or a Dollar Tomorrow?

Would you rather:

• Have a dollar today or a dollar tomorrow?
• Pay down debt or save for the future?
• Have money in the bank or money in the market?

With all of these questions, the time value of money should be a consideration. Here’s why.

The time value of money

This concept means that a sum of money is worth more today than at a future date due to its earning potential in the interim.

Today’s saving and spending decisions have financial implications for our future.

Here are examples where the time value of money influences your decisions:

• Spend vs. save
• Take out a loan vs. pay with savings
• Study abroad vs. work two jobs this semester
• Purchase vs. lease a car
• Pay off college loans or invest your money

The time value of money seeks to answer your financial questions by examining inflation, interest,

Inflation

Prices change over time, usually increasing. Because of this, the value of an uninvested dollar decreases. What your dollar can buy today is less than what it can buy tomorrow or next year.

See for yourself how inflation affects the value of money with this Inflation Calculator.

Interest

Interest can be a very powerful tool working in your favor or a very draining expense working against you.

Savings accounts and certificates of deposit are common ways to earn interest – your money earns money! A good rate of return helps money grow faster than inflation. Explore how your savings will grow differently with simple versus compound interest with this calculator.

Loans and credit cards accrue interest on what you owe; it’s essentially extra money you owe for the convenience of borrowing money in the first place. Remember that if you pay off your credit card balance in full each month, you won’t be charged interest. When you’re considering borrowing money, you’ll always want to factor in the interest to determine how expensive your purchase will really be.   

Risk

Before making any financial decisions, you’ll want to determine the risks. For instance, a standard savings account has little to no risk but also a very low interest rate so your money doesn’t earn very much over time. Investing in the stock market comes with risks, but with careful portfolio building – like keeping your money invested over the long haul – you are more likely to see bigger returns.

A money market account is a happy medium, earning a little more interest than a savings account. However, there is usually a minimum deposit amount required.

Opportunity Cost

All of the decisions you make around money can be weighed by potential loss and potential gain.

Money can only grow if it is invested over time and earns a positive return. Money that is not invested loses value over time.  

You will make lots of money decisions during your lifetime. Always be mindful of the time value of money and the elements we explored in this article. And don’t hesitate to reach out to your local financial institution with questions.

This article is provided for informational purposes only. The content is intended to offer general information on the subject matter and should not be considered professional advice, legal counsel, or financial guidance. While UW Credit Union strives to offer accurate and current information, we cannot guarantee the completeness, reliability, or timeliness of the content. Readers are advised to seek professional investment advice or consultation where appropriate.