What’s the real link between time and money?

time-equals-money

We have all heard the phrase, Time is Money. Is it really though? Time is Money means that if one is not using one’s time to make money one is losing money. This statement only makes sense if we worked ALL the time. We don’t, so Time is Money is not a phrase that is very plausible to many of us. Specifically, in a traditional a nine to five world, even when we are at work, Time is Money is not so applicable because it means that if you are slacking off during the day you would be losing money. In reality workers slack off all the time and still get paid. According to a Gallup finding in 2013, seven (7) out of ten (10) people admit to wasting time at work. Top time wasting activities engaged in were chatting with coworkers and web surfing. From the employee’s perspective, in a conventional job setting, time is not money because you get paid whether you waste time or not!

Time is Money seems to be more relevant for the employers/business owners. Here it appears that this phrase has more relevance and applicability because every minute of time invested in a business has the potential to make money or make more money. Upon closer inspection, however, we soon realize that this may not be the case because working more does not always make you more money. Working smarter, not harder is the real key to success. You can be super busy, but very unproductive and that is wasting time, energy and money! Many business owners who believe staunchly in this phrase soon succumb to the law of diminishing returns. This means that in the beginning an entrepreneur will get a tremendous amount of benefit the more time they invest in their business. However, there comes a point where for every extra unit of time spend results in fewer benefits to the businesses. At this point the entrepreneur needs to take a break. It is time to recharge and reassess and come up with a more effective plan of action.

indexI think it is safe to say that the phrase Time is Money is passé. When connecting time to money, we have to connect them through value. It would be more prudent for people to implement the time value of money concept rather than Time is Money phrase. The time value of money simply states that a dollar today is worth more than a dollar tomorrow. In a nutshell, this means you should always take your money early and always pay as late as you legally can. Let’s look at why it is in your best interest to take money now rather than later. If you are presented with a choice between taking a $2,000,000 payout today or $100,000 for the next 20 years, which will you choose? After what I just told you, your response should be “Take the $2,000,000” today. This would be correct for three reasons: inflation, interest and uncertainly. Inflation erodes the purchasing power of money so it is better to have money in hand today which can be invested to counteract inflation. You can invest $2,000,000 at 5% for instance and earn $100,000 in annual interest. Life is very uncertain you are here one day and gone the next. The institution that is paying you this money may be here today and gone tomorrow as well, due to bankruptcy, government ruling or natural disaster. This means that it is your best interest to take the lump sum today rather than spread it out over time because of no one knows what will happen to either party in the future.

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Some may argue that they prefer to  take $100,000 for 20 years because that way they will not spend it all at once. There is an implicit assumption that the individual is rational and disciple! Logic dictates that you would take this money and invest it to earn interest which counteracts inflation. If we are able to maintain a 5% return over twenty years you would in effect get $100,000 per year, which you can spend at your leisure and still have your $2,000,000 capital base. If you simply took the $100,000 per year at the end of 20 years that would be it, there will be no capital base and no more income.

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When it comes to making payments, the opposite is true, it is better to make payments in installments rather than in a lump sum. Here to we find people who are resistant to this idea because of  their personality type and or culture they find it very hard to be indebted. They are not able to accept that not all debt is bad and owing money is not a sign of financial weakness. If you have an option to pay $100,000 now or over the next 12 months in interest free installments, you should do it because the value of the dollar erodes over time. The dollars you pay six months from now are less valuable than the dollars you pay today. Also, even if you were paying interest, you could in theory invest that money $100,000 at the same or if possible a higher interest rate, this way your $100,000 can be put to work for you to pay the interest on the amount owing. Usually for small items this strategy may not be a logical because of the work involved. However, for bigger purchases, a mortgage for instance, it is a strategy that one should explore. Given the current interest rate environment it is possible to be able in theory, to pay for your house interest free or even net a small amount for a vacation when your mortgage is paid off.

At the end of the day, using slick sounding phrases may do more harm than good because it can encourage counterproductive behaviour. The relationship between time and money is one of value, understanding how to use the time value of money concept  will be more profitable than using catchy phrases that have long passed their expiration date.

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Dr. M
http://www.thekidonomicsseries.com

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