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Finance: What is the "Time Value" of Money? 21 Views
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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.
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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.
Full Transcript
- 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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GED Social Studies 1.1 Civics and Government