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?
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I’ll try to make it a real ELI5:
Say I offer to buy you ice cream, but I give you two options:
1-You can have $10’s worth of ice cream today.
2-You can have $10’s worth of ice cream tomorrow.
You’ll always choose the first option because waiting sucks and ice cream is tasty. Time you spend waiting for the ice cream is time you’re not enjoy it.
So the only way for me to make you choose the ice cream tomorrow is to offer you less today or more tomorrow.
That in a nutshell, is the time value of ice cream, I mean money.
It’s not a cookie cutter where one size fits all. In general, either use money now or invest it for the future – don’t let your money sit in the bank.
ELI5. Think of money as ice cubes. If you’re gonna take it out of the freezer, then you should eat/drink it or else it’ll melt and be useless. If you take money and put it in your checking account, it’ll depreciate and be worth less. If you put the ice cubes from the freezer to the fridge, it’ll still melt but it’ll take longer, this is the savings account.
So either use the money (I e. Ice) or put it in the freezer (invest it in stocks or something that appreciates in value).
If you are impoverished and starving, money today can buy you some food and water and shelter, but you might die (from dehydration/hunger/exposure) if you only get the money tomorrow.
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If you are investing in a business, the earlier you get some money, the more you can make form your business, because you can expand your operations sooner.
This applies whether it tools for your farm (from as little as your first wheelbarrow, or as much as upgrading an old tractor to a modern one), or buildign/upgrading a factory, or setting up a new store, or buying shares in a company doing those things.
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If you are a government, generally the earlier you build your public works, the better.
A hospital today can start saving lives sooner. A train line today can start moving passengers sooner. If you have to wait for later to build those things, then your citizens miss out for the days/months/years that you wait.
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So, rich or poor, personally or as a group, for private or public use, resources (or the money to buy them) now, is usually better than getting those resources later.
If the ideas I listed aren’t the best option to spend money today, then there is likely some other best option. And, you would like to have quick access to money when needed in case a good opportunity (or an expensive problem you need to fix) arises.
And, if there truly is no better option, then, most of the time, money today is at least no worse than money tomorrow.
Suppose you have a junk car sitting in your back yard. Would you rather sell it to me for $1000 today, or for my promise to pay you $1000 in a year?
What about my promise to pay you $1010? $1050? $1100? $1200?
Your neighbor Bill wouldn’t sell his (identical) car for a promise of $1050 in a year, but he would take either $1000 now or a promise of $1100 in a year. Bill has decided that waiting a year is worth 10%. (Of course, we won’t know for a year. There’s a chance Bill was wrong. For example, if I default on my promise, Bill loses.)
The saying isn’t so much about making more money. It’s about making sure your savings have the same buying power 20 years from now. Basically it’s better to invest your savings than just stuff that money under a mattress. Two dollars buys a loaf of bread today. In 20 years that same two dollars will probably only buy two slices. Say $50,000 is worth a plot of land today. But sit on that $50,000 for 20 years, and it won’t be worth half an acre. ($50,000 being an arbitrary number for the sake of discussion. Please I don’t wanna talk about real estate prices)
There seems to be some confusion of comparing the investment advice against inflation… but both are reasons why money today is more valuable, they’re not competing. Investment isn’t trying to beat inflation to make the advice make sense – both components are reasons why the advice is valid.
$1000 today, invested, will grow until you need to withdraw it. A simple example: Invest $1000 today at 1% monthly interest, then by December 10 (2 months from now) you will have $1020.10 available. If you have to wait a month to invest it, then on December 10, you will have only $1010 available. Because the interest has less time to accumulate. So getting the money sooner, means it’s worth more when you need it.
Similarly, what inflation does is *reduce buying power*. If you have $1000 today, you can buy 10 Widgets at $100 each today. If inflation increases the cost of a Widget to $200 (aka: the “value of a dollar reduces by half”), then that same $1000 will only buy you 5 Widgets in the future. The purchasing power of money is higher now than it will be in the future (assuming inflation instead of deflation, which in most modern cases is a safe assumption, or there’s other major problems going on)
So in other words – it’s not about how much richer you will be, or whether investment beats inflation… *both investment potential and inflation risk* are reasons why having money in hand today is more valuable than having money tomorrow.
If you know a product’s price will increase faster than an alternative method of investment, the it would indeed be preferable to purchase that product now rather than later. In fact, doing this is just another method of investment. The idea is that it’s better to be investing in something rather than letting the money sit there doing nothing.
To exaggerate, perhaps tomorrow never comes or something wild and ruinous takes place. Despite that you’d still have the money right now.
I think (don’t know a lot about this), but the big investments are to make money, but there are little investments just to keep the value of your money. So yes, let’s say food today was 100$ and tomorrow is 110$. You would want to invest your 200$ today so tomorrow you have 220$ or 230$, to keep your ability to buy stuff. That’s why is better to invest, even at low rates, than keep money “in a drawer”, because your ability to buy stuff will decrease with time.
Let’s say you haven’t eaten in a week because of lack of money.
Which would you rather have? $100 right now or $1000 next month?
Most people would rather have the $100 right now because the expenses right now (food) are more pertinent at the moment than the expected expenses next month.
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