In my Finance 101 class, my teacher taught us about the time value of money, also known as “present discounted value.” The general concept is this: the money in your change jar is worth more today than it will be tomorrow because it has opportunity to earn that extra day of interest. The time value of money is, for example, why the government loves sending you a tax refund. They know that you’ve loaned them free money each month, so any interest they gained could have been yours.
When considering the time value of money, another important term comes into play: opportunity cost. Each time we pay someone else in return for a good or service, we have traded the money, plus the opportunity to use that money, for whatever we could have used it for. Usually, this is for a memory. Perhaps that memory is of a life-changing trip to Barbados, or perhaps the smell of surprise flowers for a spouse. Usually, though, for me anyway, it is the taste of a drive-through cheeseburger or a paper cup latte. In each case, the money is gone while the memory, no matter how fleeting, is all that remains.
I have a particular change jar in my house that illustrates these ideas a little too poignantly. The jar started with 936 Lincoln pennies on December 16th, 2014, the day my daughter was born. Each penny represents a week my wife and I will get to spend with her before she turns 18. Every Tuesday we remove a penny and glue it into a notebook next to a sentence or two about our favorite memory of that week. Already, despite being just 1% of the way through the coins, the book weighs one ounce more than it did when we started, and the jar one ounce less. Our opportunities with each of those weeks have been turned into either memories in the book or lost opportunities.
In my case, it seems, the only constant is change leaving this precious jar. With this in mind, I’d like to offer some sound investment advice…
Consider the money value of time: We will often hear people say “time is money” or “another day, another dollar.” Even in our expressions we pair the two as if they were one in the same. So, if the “time value of money” means that a dollar in your hand today is worth more because of the opportunity it holds to make more, then the money value of time is the other side of the same coin. The minutes you have today are worth more than the sum of their parts because they still have opportunity which will be gone tomorrow.
Opportunity costs: True story: I took a break from typing to say “hello” to my daughter and was greeted with a magnificent smile. Not sure how much I’d have paid for that moment, but I know nobody could pay me to give it to them. Actually, somebody IS paying me to write this, (thanks Logix!) and I’d gladly pay back whatever those minutes cost for the memory. The opportunity cost of your time is why author Mark J. Perry says driving out of the way for gas always costs more than you save.
Practice yield management: Time is a perishable resource. Much like an airline seat or a hotel room, there is no value in time once it has passed. There is no inventory of time. Even increasing the value of a minute passed by the smallest amount will be more rewarding than the complete loss of that time.
Don’t be a hyper-saver because nothing is guaranteed: There are now only 928 pennies in the jar, but none of them are promised to us. While taking them out is sad, I consider it a blessing each time, because I know the next one is not promised.
Use a strong jar: There’s no guarantee that the pennies in your jar, or the moments in your life, will be there tomorrow, but you can increase your odds by making sure you’re doing everything you can to strengthen the jar today. Spending time improving your health will help ensure you use up the pennies you have, and maybe even add some you weren’t counting on.
Compound your interests: If we invest right, we’ll build value not just in the penny of the week, but in all of the other pennies we’ll pull out in the future. Building experiences, memories, traditions and inside jokes with her when she is young will increase the value of our memories in the future.
Make sure your pennies are glue-worthy: I hope I never have to think very hard about what memories I’ve made with my daughter as I glue a week’s penny into our book. I know that day will come, but I hope we’ll be long on flowers and short on lattes.
Let’s retire: Whatever we save for Penny’s college, I hope she graduates and knows that our highest investment was in memories with her.
As of the time this article was published, our daughter is 8 weeks old. The money value of time is different for everyone, but for me and for this particular account, it is down to $9.28 and going fast.