“Money today is worth more than money tomorrow”

Question

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

Answer 1

I suggest subscribing to /r/personalfinance , it’s a highly informative subreddit for learning about money.

Let’s say you turned $1000 into $2000 over the last 15 years or so. The price of the goods you actually buy has increased. For example Subway’s $5 footlong is now an $8 footlong.

Economists have a name for this:

– Nominal return: You increased your wealth (measured in dollars) by 100% (from $1000 to $2000) over 15 years.
– Real return: You increased your wealth (measured in sandwiches) by 25% (from 200 to 250) over 15 years.

Usually they are quoted per year:

– Yearly nominal return: 100% / 15 = 6.67% per year.
– Yearly real return: 25% / 15 = 1.67% per year.

This is a major reason people invest in the stock market. [This historical data shows](https://en.wikipedia.org/wiki/S%26P_500#Returns_by_year) that over long periods of time, you get 10%-ish every year from the S&P 500 index fund. This is typically outpaces price increases like in our Subway example.

(Warning: Stock market returns fluctuate wildly in the short term, if you watch your stocks’ daily ups and downs you will see yourself lose $X000 one day, then make $Y000 the next. Sometimes there’s many losing days in a row and you’ll feel like the stock market is a terrible place to put your money and sell everything. Which is exactly the wrong thing to do, human emotions are bad at managing money. You have to be robotic and take a long term view. If you’re working, try to put about the same amount of money into the stock market with every paycheck, and don’t let your strategy be affected by the press handwringing about QE or QT or interest rates or inflation. In the US, check into retirement plans that let you invest in the stock market and reduce your tax bill.)