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Finance: What is the "Time Value" of Money? 21 Views


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Description:

What is the "time value" of money? A dollar today is worth more than a dollar tomorrow. You can always invest your cash and earn a return.

Language:
English Language

Transcript

00:00

Finance, a la Shmoop. [title page]

00:03

What is the time value of money?

00:05

Hmm...

00:06

Well, think of money--the money you'd be investing--as sitting in a pile on a continually moving [money on escalator]

00:11

escalator with checkpoints every day.

00:13

Well, this is the investing escalator, and this particular escalator is the escalator

00:18

of safe bonds. [safe bond bag and escalator]

00:20

It moves at a slow, steady pace, but each week, the bag gets slightly bigger, and there

00:25

are no holes in the padding--no cliffs it will send you over. [bag grows]

00:28

All right, now this is the escalator of risky equities. [equity escalator shown]

00:32

All right, hang on tight.

00:34

Yeah. So equities are things like stocks, and we're focused here on risky ones, like just IPOd

00:40

companies. They could be Yahoo in 1996, which whent up 50+ times over its IPO price, or it could [Yahoo growth chart]

00:48

be Crap.com, which IPOs and then went bankrupt three years later. [toilet flushes]

00:53

So, why does all this matter on the escalator?

00:55

Well, because if you zoom out on equities, you'll see that over long periods of time--like

01:00

decades--money grows, and well, it grows a lot. [growth chart]

01:03

Over time, the stock market has almost always produced a very nicely positive investment [money baby grows]

01:08

return.

01:09

It might be a year from now that you see significant returns, or it might take ten years, but you'll [person gets money back]

01:13

be headed in the right direction if you wait long enough for the golden love.

01:17

All right, well to illustrate, check out the S&P 500 chart right here. [chart shown]

01:22

Okay...

01:23

Well, you can see there wasn't a whole lot of action from 1950 to the mid-1980s right

01:28

there, then the 70s here is flat--nothing happened. [growth illustrated]

01:33

Dividends grew a whole lot, though.

01:34

And then when Reagan came to office, all kinds of good things started happening to the sock [Reagan appears]

01:39

market.

01:40

Look at 1980, and then blam, it cranks up through 1988.

01:43

And then, we get the mid-90s.

01:45

Greatest bull market in history, with the Dot com bubble exploding right there, and

01:49

things went down a whole lot... [events illustrated]

01:50

And then things came back, and then they went down a lot, and wow, look at it in 2017, it's cranking.

01:57

So yeah, welcome to a quick tour of the stock market.

01:59

That's kind of how things hang, but you can tell from 1950 to today, it's a nice, sloping,

02:04

upward line there. [person demonstrates stock market]

02:05

Yeah, that's the stock market.

02:07

And go back to the 1970s thing right there, where everything was flat.

02:11

Well, the stock prices back then didn't have to go up a ton for investors to be handsomely [investors paid in dividends]

02:17

paid for their invested capital.

02:19

They got dividends for them.

02:20

The point of the escalator is to highlight time, here.

02:22

That's the ding-ding-ding sound you keep hearing in the background as each day passes and another [money plant watered]

02:27

iteration of safe bond compounding happens, or dividends get paid, or equities grow in

02:34

value over time.

02:35

All right, well why is time important? [clock ticks]

02:37

Because like oh so many cliched Wall Street movies claim, time really is money.

02:43

The more time that passes, the more your net worth swells, usually. [investment grows]

02:47

It's how the already rich get richer.

02:50

Well, the amount of risk and time you have to lock up that investment determines which

02:53

kind of escalator you're going to put your investment on, but it can always grow, so [people choose escalator]

02:57

there's always value in the time you lock up your money.

03:01

Remember that fact the next time a buddy asks to borrow a grand and somehow doesn't expect [person loans money]

03:05

to pay interest on that thousand bucks for a year.

03:08

The stock market has averaged going up about nine or ten percent a year for a century and

03:12

change, and the bond market about half that much, because it carries a lot less risk. [upward trends demonstrated]

03:16

So duh, it carries less reward.

03:18

All right, well the grand you loaned your pal for a year could have given you a free

03:21

50 bucks in interest in the bond market, and maybe a lot more if you'd think about investing [friend pays interest]

03:26

it in the equity market... 10, 15, 20% for a good year.

03:30

So yeah, the trick is to take the money you make and then let time put that money to work [money works for time]

03:34

for you.

03:35

The best part about having your money work for you is that you don't have to give it

03:39

paid sick leave. [money is pretty sad in this harsh work environment]

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