Time Value of Money

An ancient proverb says, “A bird in the hand is worth two in the bush.” Some people might believe it to be absolutely correct, and maybe when this proverb was first coined, it even might have been the case. And while the tables might not have turned much, the times have surely changed. All things considered, and with money playing such an important role in almost everything happening around us, we might have to go into the recesses of our minds and ask ourselves, “How important is my time when compared to my money?”

While we are all pressed for both time and money, given a choice, which one would you value more? Is it better to focus on earning as much money as possible, or is it better to use your time judiciously? Let us consider a simple example. Would you rather have one lakh rupees right now, or one lakh and twenty rupees after a year? Any individual would think of all that could go wrong in a year and would like the money right now. Hence, for moral purposes, let us assume that this incident is happening in a perfect world, and you will definitely receive the said amount on the said date. And if we increase the amount, the stakes go up considerably higher. Faced with this problem, what would a smart person do?

As it turns out, there is a simple mathematical formula that could solve the time vs. money dilemma for us. Called the ‘Time value of Money’ or the net present value (NPV) of money, it is a fundamental concept of finance, which states that money in the present is worth more than the same amount of money to be received in the future. Now, this holds true because the money you have can be invested to earn a return, and in doing so, creating a larger sum of money in the future. So, is the same amount of money worth more in the future?

Coming back to our example; the question you have to ask yourself is what kind of investment benefits you can reap from the total amount. 1,20,000 is 20% of 1,00,000 and if you think you can reap dividends more than 20% of the amount by next year, you should take the money right away. On the other hand, if you think you’ll not be able to break even or gain more than 19% in the coming year, it would be wiser to take the future payment. 

Most successful businesses start with debt and instant loans because their founders realise that incurring debt today is indispensable to growing and expanding. Similarly, most investors today are not afraid to burn massive amounts of cash today to help start-ups succeed because they understand the returns these investments will give in the future.

The time value of money is affected by a few external factors as well, primarily among them being inflation (the rate at which the average price level of goods and services in an economy increases over a period of time) and purchasing power (value of a currency, in terms of the number of goods or services that one unit of money can buy). Both these factors play major roles in determining the best possible results for you, as they significantly contribute to the major part of the calculations. For example, today a litre of petrol costs around 79 rupees in Mumbai. Thirty years back, in 1989, the same litre of petrol costs only eight rupees. That means an almost tenfold increase in the price of petrol over a period of three years.

Time Value of Money: The Formula

The actual formula to calculate the future value of money, when compared to the present value is this:

        FV = PV x [ 1+ (i/n) ](n times t)

Where:

FV = future value of money

PV = present value of money

 i = interest rate that can be earned on the money

 t= number of years 

 n= number of compounding periods of interest per year

Now, using this formula, let us take a look at a situation, where if you have one lakh rupees, and you can expect an interest rate or return of 10% on that sum each year for four years, and assuming that the interest is compounded yearly.

     FV = 100000 x [1+(10/4)] (4×5)

      = 1,46,410 rupees

Similarly, by simply dividing the equation instead of multiplying it, we can deduce the present value of the money, to evaluate how much return do we need to earn in order to equal the sum offered.

Now that you have an understanding of what your time is worth in terms of money, it should be easier for you to weigh your options when it comes to deciding what your priority is.

Time vs. Money: What to choose?

In the words of Henry David Thoreau, ‘Wealth is the ability to experience life fully.’ In a popular survey conducted on about 4400 subjects, both online and in-person, people were asked what they would rather have, more time or more money?  Unsurprisingly, the majority (about 64%) chose the more practical way and ended up choosing more money. But the people who said they wanted more time seemed happier. When probed further, the research found out that the people who chose to wish for more time also tended to be:

  • Older, which suggests that we get more satisfaction from valuing our time as we age. 
  • Parents, which suggests that having children may change our views on the subject.
  • Married, again leading credence to associating values to people.
  • Financially more affluent, meaning lesser worries regarding basic survival needs.

The study concluded with the suggestion that if one makes enough money to take care of one’s basic amenities, and wishes to start leading a happier life, one shall have to start attributing more importance to time than money. Equally notable is the fact that a portion of the people who opted for money might not have had a choice at all. If prioritising money over would not have been an absolute necessity for them in order to sustain a life where they can at least afford the bare minimums, the results might have been different.

That being said, when it comes to worldly matters, we cannot totally disregard the importance of money, nor can we judge people for prioritising it over time, or any other resource, for that matter. Being oblivious to the value of money in today’s world will not be beneficial either. Just like when an ostrich sees a sandstorm in the desert approaching, it hides its head in the sand, thinking that if it cannot see the storm, the storm can also not see it and hence foolishly considers itself immune to the impending calamity. Similarly, we must recognize the importance of money and accord it the value it deserves; anything over or below that will result in discontentment. 

Both time and money are crucial aspects of our lives, and we should learn to create harmonious synchronization between the two of them, very similar to how we manage our work-life balance. As is the case with everything else, your mentality towards the time-money conundrum has a lot to do with how successfully you’ll be able to ensure peace of mind by achieving the perfect balance between both of them. It is true that money, or rather the lack of it, is one of the major causes of stress, but people who pay more emphasis on time usually turn out better off in the long run. And that is hardly surprising because money flows. It comes and goes, and the cycle keeps repeating itself. But time is one commodity that, once gone, can never be acquired again.

Another famous economic law, the law of marginal utility, says that each subsequent unit of product or service consumed gives lesser comfort and joy; thus, indicating that there is a limit to the material things we can derive pleasure from as well. In other words, no matter how much money you have, you will not able to barter it for happiness, even for your favourite thing.

Money vs. Time: The Final Word

People often complain about not having enough time to do the things they would like to do. People also often complain about not having enough money to do the things they would like to do. We see extremely rich people ravaged to the ground, buried deep in debts. We also see beggars on the street, who have all the time in the world, leading a pitiful life due to lack of money. So, we can at least infer that money does not cause happiness and that there is a limit to the utility that money has.

When confronted with a choice, most people will end up choosing more money, and even after they realize the importance of more time, it usually takes a while to obtain that mentality shift. Put in a situation where people live paycheck to paycheck, it becomes challenging to justify prioritising anything above money. But once you’ve reached a stage in life where you can afford basic amenities with considerable ease, you should start looking for ways to save more time because more money is simply that, more money. But more time? More time opens up a whole new world full of possibilities for you. More money might end up spoiling your children, but more time with your children would result in both a happier family and better parenting. Similarly, if you focus on earning more money, even at the cost of your health, you won’t be able to fully enjoy it. But if you have more time to focus on your health, you’ll be able to experience life much better, even with lesser money and riches.

The bottom line is money matters a lot. But the maxim stands true that money can buy you many things, but not everything. And as human beings, the emotional, mental, and spiritual aspects of our lives are something that money cannot muddle with at all. Hence, it would be a really good idea to start investing in time rather than money. And as far as the value is concerned, you can always calculate how your money is standing up in comparison to your time. This world is a giant swiping machine, and your time is your debit card. Spend it wisely.