Time Value

There is a concept that I came across while in a finance class called the time value of money.  Basically what the professor said was that the true “value” of money changes over time.  The idea was that money today, if invested, could be worth significantly more in the future.  For a corporate executive this matters when determining how to invest the company’s money but I feel it is even more significant for our own personal lives.

Dave Ramsey has spent his career teaching financial discipline and conservative spending.  He (as well as financial guru Robert Kiyosaki) spends a lot of his time trying to dissuade the reader from buying things in life that move us away from our true goals of financial freedom.  He understands that the nice TV, fancy car, and expensive vacations are the reasons that we are not financially independent.  

Another way to look at money is to try and determine who is getting “rich” from the transaction.  If you are taking out a loan with interest, the lending institution is earning money from you.  If you invest your money and earn interest you are the one earning money from your money.  Who is making money from the transaction?

An even more powerful way to approach money is to use a time value.  A great tool for determining this can be found at Dave Ramsey’s website.  He provides a calculator which will allow you to enter an interest rate and length of time to see the true value of that money.

Recently I was at work talking to a coworker about cars.  She said that she dreamed of owning a specific $100,000 car and wished she had enough to purchase it.  I decided to see what the time value of that purchase would be in 30 years with an average rate of return.  I plugged in the numbers and saw that in 30 years, earning 12% return, that $100,000 would be worth $2.9 million!

Imagine winning the lottery for $100,000 at age 35 and buying the car.  In 10-15 years the car is probably worthless and your money is gone.  Now imagine that instead you invest the money and retire with $2.9 million of “free” money.  Being able to “grow” your money is an important skill but overlooked and undervalued in today’s society.  

Looking at the time value of money shifts your perspective.  Instead of finding reasons to justify the purchase, we immediately change our mindset and decide to do what is best LONG TERM rather than simply satisfy our immediate urges.  

Money is not the only thing that has a time value.  Almost any habit can be looked at the same way.  Next time you are at a restaurant and deciding what to order, don’t just think about right now.  Image that the choice you make today becomes the choice you make every time.  Now it isn’t about ordering a juicy bacon cheeseburger or ordering a boring piece of fish this one time.  It is about that decision being made over and over again. 

That is exactly what our habits are.  Our habits are a one-time decision that we make.  But instead of it being a meaningless decision, we use that as a reference and make that decision over and over again until it becomes a habit.

How do people become smokers?  They weren’t addicted before they ever had a cigarette and they weren’t instantly addicted.  At some point they chose to try a cigarette.  Then they made that same decision over and over until it was a habit that they no longer had control over.  

The good thing about habits is that you can reverse them using the same principles that formed them.  You can make a good decision over and over again and suddenly you have positive habits that take you where you want to go in life.  

I used this exact approach to transform my habits.  I quit smoking by forcing myself to only focus on today.  I repeated that “I may not quit forever, but today is not going to be the day that pushes me back to smoking”.  Instead of focusing on the huge, almost impossible goal of quitting forever, I made sure I focused on something easier… just this one time I have to choose to pass on having a cigarette.  

I started to evaluate my purchases with this mindset.  Putting something on the credit card without the ability to pay it off right now meant that the credit card companies were getting rich off of me.  I made each purchase more difficult by creating a budgeting system where I would have to keep and document each purchase I made.  Each time I made a bad decision, I would have to input that in in my budget document and it reminded me, after the emotion of the purchase was gone, how impactful it actually was.  Slowly my perspective changed so that before I made the purchase I would feel the negative feelings associated with inputting the purchase in my budget document.  

Even exercise can be looked at this way.  Exercising today is meaningless if you never exercise again.  But exercising today is powerful if you do it every day.  Soon the habit will form and you will continue towards a healthy lifestyle.  Again it always comes down to that spur of the moment decision, do I work out today?

Regardless of how your habits developed you have control over them and can change them so they direct you towards your idea of success.  It isn’t going to be done for you and if you ignore them they will form automatically, but likely in the wrong direction.  

Take this opportunity to explore the principles that I outlined at ScottMiker.com to finally gain control of the habits that have been guiding your life without even knowing it!