I get that the value of money depreciates over time hence why they tell you that the best time to invest is now. But i don’t get how exactly investing now helps you in the future if the cost of living increases with time too anyway. So like let’s say you invested $1000 today and then in the future that’s equivalent to $4250, but then the price of things have also increased so how much richer are you really if you have to spend a lot more in the future anyway?
In: 64
Yup that’s the rat race. If inflation outpaces your investment growth, you get poorer. As your money sits in the bank, you get poorer. If you’re lucky enough to get a raise, but it does not keep pace with rise in cost of living, you are effectively making less money each year.
Have fun!
If prices are going to increase, they’re going to increase whether you invest or not. This is, in fact, the main reason someone would say something like “Money today is worth more than money tomorrow.” In the situation you described, would you rather have $1,000 to invest now or $1,000 in the future when prices have increased?
Over time, your money usually grows faster than the price of the products you buy with the money. So, your money may triple when prices only double.
The idea is that if you hadn’t saved the money, you would probably have spent it on stuff that you didn’t need. It’s better to be in the future with $4250 than to be in the future with $0 having spent $1000 on, say, candles. If you *did* need the money just to survive, then you wouldn’t have saved it.
And if you’re going to save the money, it’s better to put it into a relatively safe investment than to hide it under your bed, where it will make zero returns and is probably more likely to be stolen than you are to lose money on, say, government bonds or a savings account with a major bank.
You have to compare the % returns on your investment to the inflation rate. Long-term (>10 years), inflation will really eat into the value of your savings, so if you don’t need the money right now, it’s better to keep it invested somewhere where you can safely expect the average returns to outpace the average inflation.
However, investments that give such high returns can be risky, and might lose you money in the short term. So if you need the money soon (~0-2 years) it can be better to keep the money in lower-yielding, more-stable investments or savings accounts. Sure, inflation might overpower your investment a little bit in those few years, but it’s better than losing a large chunk of it right when you need it, and it’s better than cash under your mattress.
The theory behind it is that your investments will increase in value faster than the rate of inflation.
Here is an overly simplified example.
The US government claims that “normal” inflation is 3% a year. If you make an investment that returns 4% a year, you’re coming out ahead 1%. (FWIW – the 3-year rate of return on my 401K is ~11%).
This is a simple example because there are things like taxes that you have to pay on your investments. The taxes vary based on a number of factors. There are some investments that grow tax free.
Would you rather have a chocolate today or tomorrow?
lot of people have this backwards.
This is referring to money. not investments (which break this saying)
inflation means cash is continously losing value, prices rise, but that $20 bill doesnt change. So you can buy more with $20 right now than you’ll be able to buy with it later.
So there are two sides to this.
The investment/value side which has already been discussed. The tl:Dr is that investing money is almost always going to give you a better return than whatever delayed payment would give you.
The other, more important, side is that money today gives you more *options*. If you get the money today you can use it today. If you have to wait for the money you can’t use it today. The option to use the money whenever you want is extremely powerful.
Another example is that money later is not guaranteed. The person/organization providing the money could go bankrupt or die or all kinds of things. On top of that, you might not need or be able to use the money later. $10,000 today is much more valuable than $1,000,000,000 in 100 years. Regardless of inflation, if you’re not alive to spend it it doesn’t do you any good. Same with something less dramatic like other life events.
If you invest $1000 today and in two years it would be equivalent to $4250 then it doesn’t matter because your economy is screwed by hyper inflation
If you invest $1000 today and then in 30 years it has the buying power of $4250(5% inflation) but you got an 8% annual return then you have $10,062 in the bank an effectively doubled your money over time
For reference, $1000 in 1978 would be worth $4126 today about 44 years later so it’s generally a pretty long time scale. Investing $1000 in the S&P 500 in 1976 would get 10 shares that would be worth $37.6k today
If your investment options don’t return more than inflation then you should be more worried about general economic collapse than having less money far into the future
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