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
you are richer by $4250 than if you didn’t invest. which means you could eat without having to go to work for a certain amount of time.
Other example. I’m currently investing in a business and have spent about $20k so far. A friend on mine wants to invest in the same business and would like 50% of the holdings. I told him fine, invest $20k at cost so that we would’ve invested a total of $40k in the business for 50% each.
He tells me he’s fine with investing $20k, but will only be able to give me the money in 12 months. To which I said « money today is worth more than money in the future ». Reason being that he could invest his $20k (assuming he had the full amount) in a rather conservative 401k or other relatively safe investment and have more than $20k in 12 months.
So while I would be investing my money to take care of critical business needs and forgoing the opportunity cost of using that money alone, he would essentially be enjoying the « privileges » of owning 50% at $0 down for 12 months whilst still investing his own money. Everything else being equal.
If you have a 1k $ and it can buy you a fridge for example, in 5 years a fridge will be 4k$ and your 1k doesn’t worth like now
To your example: prices will go up anyway. Would you rather have $4250 tomorrow (i.e. $1000 today) or $1000 tomorrow?
If you have money today you have two choices:
1. You can spend it today.
2. If you keep it, you have it tomorrow.
If you are getting money tomorrow, you only have that second choice (you can’t spend money you will get tomorrow, yet).
Therefore money you have today gives you something good, and that makes it more valuable.
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.)
If today you had the option to buy a can of Pepsi for $1, but chose instead to put that dollar in a piggy bank, then in 10 years, you’ll open your piggy bank and have one dollar, but now a can of Pepsi costs $3. Your money has lost value.
If you chose not to buy a can of Pepsi for $1 and instead put that $1 into one stock share of Microsoft, then maybe in 10 years, that can of Pepsi will be $3, but your stock is now worth $5. In that case you made money. OR maybe that stock is only worth $1.50. In that case you lost. Or your stock is now worth zero. That’s the gamble.
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