Time Value of Money – Episode 507     

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, on this episode, we’re going to be talking about the time value of money. I think this is the hidden component that people don’t teach or follow anymore because they don’t understand it. So Kim, we’re here to get some understanding, some clarity. I love it. Well, one of the things that comes to mind when we talk about this is a message of mine that I love, and that is the idea of promote or promotion. And I am a natural promoter. Like when I get something that works, I will naturally promote that. It’s just what I do. And you could say some of that is the sales work that I do because sales is helping people take action. And sometimes I don’t even feel like I’m a good salesperson.

[00:51] I had a client just a couple days ago and I did not help him get super clear on his next steps. And I was really disappointed in myself because I was promoting that he did something but then I wasn’t helping him make the decision saying, no, that’s okay. And so when you look at that idea of promote in relation to the time value of money, that is the most time value of money is the most esoteric thing that us human beings have to get our arms around. And it took me probably two or three years when I was new in the business. So I came out of college. I worked at a bank for a while. I got my first HP 12 C and that really forced my learning around time value of money because here’s the thing your typical calculator that all of us use that

[01:49] has plus and minus and multiply and divide does not address time value of money. Only a financial calculator like HP 12 C or truth concepts or Texas Instruments 80 whatever it is, you can actually get them on your cell phone now as apps, but only a financial calculator can help you equate, calculate, understand, function with the concept of the time value of money. Now you’ve got kids, so I bet you have an awesome story to share whereby you’ve helped your children understand time value of money. I want to hear that and then we’ll talk a little more. Absolutely. So I have to set the stage of how I learned about it. And I actually learned this principle and cemented the principle through your husband,

[02:45] Todd. I have found that his ability to take the complex and reduce it down to something that I could understand was helpful for me and for my kids. So that is the principle where we started from. So where my children were able to learn this is simply going through and we run this process where we’ll run it. We’ll one, we’ll clean out the stuff that we don’t need and there’ll be piles that go to charity and then there are piles that get sold. And then what we do is we say we’re going to split it down the middle 50 50. So you guys do the legwork and you’ll put it up for sale. Could be on marketplace, wherever that is, and we’ll split the profits 50 50. So where the time value of money and the ability for them to see that is that now

[03:42] they took some of this and they were able to use it to purchase other products and they’ve gone through and purchase so they could sell on eBay and other things of that nature. They can now see where they started. They can see where it’s ended up and they can see the use of that money. They can also see where they spent the money on liabilities and they no longer had the ability. And at that point, this is the mean dad. This is what I do is I say, hey, that’s cool. I’m the bank. I’m happy to fund it. You get less equity in the deals by giving them less equity. That is the one the principle that’s taught them to be able to look at money in a long term perspective. I love it. That’s so cool. Well, really, when you think about it, everything in our life, and this is an

[04:36] economic principle, more than just a financial principle, everything in our life has time value associated with it. So when I go to choose what I’m going to eat, I can pack down a hamburger and fries with the best of them and a shake, by the way. And how do I feel the next day? What does that do for me in a year? So that’s an element of time value. The marshmallow study that many people are familiar with, a whole bunch of kids put in a room, they were given a marshmallow. They were told if they could wait 15 minutes or 10, or I don’t remember the numbers, short period of time, but some time for young kids, then they would get a second marshmallow. That is an element of time preference or time value of money.

[05:19] You can think about it this way, too. If you had $100 and you said to somebody, I’ll give it to you. And 20 years from now, you can give me back the $100. Like most people would, they would just bristle at that. They might not know exactly what’s wrong, but they know something’s wrong. And that’s because I’m not even talking inflation and everything else. I’m just talking about the fact that 20 years later, $100 needs something to go with it to affect the time that occurred between when it was given and when it was paid back. And so, yes, truth concepts calculators also helped me understand. So I had my HP 12C at the bank and then I got into the business and I looked, this is all pre-internet, I looked at special software programs

[06:06] that would help people figure out things like future value of money. And then tougher concepts like present value of money. And those are both just financial concepts, but they’re economic concepts as well. So it’s been an interesting thing as I’ve helped people now with finances for 30 years and Todd has two a little longer even, and Todd helps advisors, which help people. So just wide, wide, wide range of experience. We’ve kind of come full circle to see that everything that you make monetary decisions around boils down to time value of money. And it is something that you must absolutely get your arms around, at least conceptually. And then sometimes the numerical aspect helps us get it conceptually.

[07:00] Sometimes we have to get it conceptually first and then prove it numerically. And yet it’s just not an easy thing to do because not everybody knows how to use an HP 12C or wants a financial calculator on their cell phone. Nevertheless, that’s what it takes to really, truly get a handle on what time value money is and what it does. Absolutely. You mentioned the piece to this, which is taking the simple meal, you know, hamburger fries and a milkshake. We can take that even of just saying like what the amount of money that would be. And you’ll hear people at a seminar say, well, you could have taken all the money you spent on lattes and coffees and that could have been invested and blah, blah, blah, whatever.

[07:41] But what I want to look at it is I want to actually break down some of the words that are used. So time, value and money, because what often times we see problems is that you can get a little too rigid and every single dollar is absolutely squeezed to the max. And now you have lost some of the value in that, or maybe you’ve lost some of the time. And then you get to the other side where you don’t care. And now you’ve lost the true meaning of why you’re doing what you’re doing. And so you’ve been able to find that balance. One, I would say using tools like the Currents app, going through, having some of your savings automatically taken care of. Two, using the right vehicles, using the life insurance as a vehicle

[08:40] as well. And then the third is not having to worry about the little budget of the coffees and saying, things are OK. I can actually splurge and enjoy because my money is working. So how have you been able to find that balance? Well, I really think it all boils down to saving first and then spending the rest. And we’ve done that as a family for years thanks to Carrie, the bookkeeper that has helped us do that and our life insurance premiums, which just forced us to pay them. And then that got us into this profit first mentality, which we did personally with the premiums. And now we have even more capability with the Currents structure, which is an app plus an account. And we, Todd and I, adopted a house of both perspective,

[09:29] I guess you could say, a long, long time ago, which says do what you must do and do what you want to do. And it really does come back to time preference. So both of us really enjoy working. Awesome. And we enjoy vacationing. And we learned from strategic coach that vacations actually contribute to your working abilities because you come back rested and refreshed and ready to go. And so I’ve always since strategic coach and that house of both idea, just I think entrepreneurialism as well, been really conscious of what am I spending my time on? Is it the best use of my time? Great quick story. My son, Robbie, is a real estate investor, helps overhaul apartment buildings, was missing a $250 five gallon can of paint

[10:23] because they needed it. They couldn’t find it. It was in a storage unit somewhere. And it’s March in St. Louis. And he’s like, I could spend an hour looking for it. It might be frozen, which means it would be worthless. Or I could just go spend the money and get new. And so that’s, I think, a great example, too, of what you said you separated it out. It’s time, it’s value, it’s how much you value your time. And then it’s money. And money is something to serve us. And when we adopt that prosperity thinking, we can see it as such, even though it may be a struggle. And it’s always going to have its elements and its roles that it plays, some of which really challenge us sometimes. And that is OK, too.

[11:14] Life would be very boring if it was all built on certainty and no fluctuations and things happening exactly the way that we wanted them all the time. And we would get so bored. Absolutely. And stack that on, it would be absolutely boring if we tried to optimize every single penny for time value of money. I have an anchor memory of that. I’m not going to use his name. But I remember when, for my high school senior trip, a group of us guys went to Hawaii. And my friend’s parents, they had a timeshare. So we were happy we got to be in the timeshare. One of our friends was that guy that saved every penny and was all time value money focused. And on the trip, in his suitcase, he packed macaroni and cheese

[12:08] and ramen. And I’ll tell you, it was kind of miserable being around him. We had a great time. And we also worked hard for it. And then we came back refreshed. He didn’t come back as refreshed as we did. That’s the difference. Kim, this is one of those principles, time value of money, that few understand. But you’ve said one thing in here that any of our listeners can apply right now, which is you’ve got a savings first mentality. Because when you work that way, you’re able to have some clarity. You’re able to see with a clear vision of what the future is. And then all the other pieces can fall where they need to fall. That was really well, really well said, Kim, the clarity that you gave us here.

[12:59] Thank you. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.