1€ in the hand is worth how much in the future?

Something that is very important about any kind of investing mindset is the understanding of perspective. Essentially this means understanding the time value of money – money that you spend or choose to not spend at this moment – what could potentially happen to it in the future?

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The time value of money

The time value of money is an essential concept that gets drilled into the head of pretty much every financial manager out there. I had a 5EAP subject at TTU this semester which basically boiled down to this same idea as well. To save you the trouble of having to spend time with my mildly sexist professor – in the event of other things being equal it’s always better to have the money now.

Money loses value as time goes on. This was painfully obvious during the financial crisis – inflation ate away at the value of money so if you had 1000€ at the beginning of the year, then by the end of the year it was more likely to be worth closer to 900€ than the original 1000€ in terms of purchasing power.

This very idea is the basis for pretty much all investment advice which tells you that the best time to invest was 20 years ago and the second best time is now. The younger you invest, and the more, the more likely you are to end up making huge returns. The stock market’s historical returns are around 8%, which means that every year that you delay your investing you have to invest roughly 8% more to get to the same results. As time goes on, that 8% keeps increasing as compounding interest starts working against you.

So much is your 1€ worth?

Quite often people spend money on tiny purchases without thinking much – it’s just 1€. The problem is that if you add up an euro here and there, then it ends up in hundreds and as years go by that compounds into thousands.

Just to give you a visual of what this works out to. I’m currently 25 so I’m likely to retire at about an age of 75 looking at the current trends in retirement ages – this means that I have 50 years to gather up money. (Or less if I want to retire early.)

This is what is likely to happen to any single euro that I invest at this point with a pessimistic return of 5% and a more likely historical 8% of the stock market. Looks impressive, doesn’t it? At a 5% return it climbs to 11€ in value, at an 8% return it climbs to 43,5€ in value. (Leaving out inflation and changes in money value, let’s think in today’s money.)

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How much should you worry about that 1€?

MrMoneyMustache I think was the one who has a great philosophy about the impact of saving on your future. Essentially, it isn’t so much about short term savings and keeping yourself from spending that x amount (though that is important too). It’s about adjusting your standard of living to spend less recklessly – every euro that you save WHILE keeping that euro off your everyday life expenses actually ends up saving you the original 1€ that you’ve not spent and also saves you from having to save so much for retirement – because you don’t need that much money.

Seeing as the logic of most retirement portfolios is that if you want to spend x amount of money per year, then you have to save 25 times that. For example, a 1000€ per month vs 950€ per month in planned expenses means that you have to save 15 000€ euros less for your portfolio.

This doesn’t mean that you have to go mad with saving money (some do) and sacrifice your free time, health or enjoyment of life to save that money. There are however several very reasonable things that you should be doing that will help you free up those very important euros for investments. Like a lot of other financial tips, these things compound on each other as time passes.

Important steps to keep expenses down

1. Spend reasonably on the big things. (It’s silly to fuss about the lattes if you’re overpaying on your car or rent)

2. Buy high quality items. (This might mean higher initial costs – but you can afford that – it will mean lower overall expenses)

3. Spend on things that matter. (I’m sure just looking around your room you can find things that you wish you hadn’t bought – I can!)

4. Put in some effort to find good deals. (This means rewards programs, sales etc. A bit of effort can have high returns)

5. Take good care of your things. (Things like your home, your car, all sorts of tech lasts a lot longer with proper maintenance)

What’s your great habit to keep expenses down?

11 thoughts on “1€ in the hand is worth how much in the future?

  1. Invest in a bike. :-) Most people in Estonia work for one hour per day to earn money for fuel for faster and more comfortable transportation during this day. It is better to save this money and spend this hour enjoying cycling. (I have a car, because sometimes it is really irreplaceable.)

    How big passive income would allow you to retire at the moment?

    1. I am actually an Estonian who does not have a car! I walk to work and get around using public transport most of the time! I assume this is one of the reasons that allows me to invest – not having another huge money sink (car + fuel).

      Looking at my current expenses, about 800€/month (+ health insurance) would allow me to keep my (comfortable) standard of living.

  2. Not wanting all sorts of irrelevant and unnecessary pointless things has worked out quite well so far and I expect it to continue to work out rather well in the future also :)

    1. True, but sometimes it’s hard to tell if something is pointless. Like that really good book – which you never get around to reading twice or an upgrade to you PC that you want but don’t really need.
      Having willpower however is very necessary on the path to financial success so you’re lucky to have it!

      1. With proper techniques and approach you barely need any willpower. Of course, it’s a lot easier if you are already used to not wasting money, before you start saving, because the hedonic treadmill effect hasn’t ruined inexpensive pleasures for you.

        As long as you keep it that way and use the small amounts of needed willpower in a smart way, there’s not too much effort involved in this. Especially if you know what you want or need.

        For example, I start any bigger shopping “event” with a concrete knowledge of what I need. When I purchased a new PC because the older one died and I could barely even write any blog posts without it lagging like crazy, I also started with the end goal in sight.

        I specifically thought through what the PC has to be able to do performance-wise, took the requirements of the most demanding program I thought I’d have to use, added some extra room so that I wouldn’t have to buy a new one again in a year and set off to get a PC that would match those needs, nothing less, nothing more.

        Since I had very specific requirements and the salesman didn’t know at all what they were selling and wasn’t much of use, I ended up buying the pieces and putting it together myself from another company and ended up saving a decent sum on it and even got a bit better machine than the stock option would’ve been.

        Had I started by going to the on-line shop and reviewing the inventory instead of deciding what I need first, I probably would’ve bought some third best option that would’ve looked extremely cheap with its 1500 € price tag compared to their number 1 option at 5000 €.

        1. I think it’s maybe not even so much an issue of willpower but an issue of being able to prioritize and understand what’s important. With the PC example – I’m likely to buy something a bit more powerful because I value a great user experience and this is something I’m willing to spend money on. However, it gets silly if you start spending money on all things while not realistically getting extra value from the extra money that you spend.

  3. Hi Kristi,
    A nice article! I’d mentioned about the future value of money in a comment a couple of days ago so it’s good to see a more detailed post about it. One area where inflation & future value can actually help you is with long term debt payments – if you’re unable to pay down a 25 year mortgage early, at least the monthly payments in 15-25 years’ time should be worth less (more affordable) than they are today.

    Best wishes!
    -DL

    1. Sometimes it’s also useful when buying things with back payments. Although in those cases you would have to consider the inflation/deflation of the specific item you’re buying instead of the general inflation/deflation or changes in interest rates.

      The tech gadgets are one example where it might seem a good idea to buy with a back payment with 0% interest rate, but if you consider the fact that you’re paying the 2000 € for the next 2 years and the retail price will drop 50% within just 6 months, then it’s suddenly not that good of a deal anymore.

      Can become complicated, but very useful knowledge to have nevertheless, indeed.

      1. Indeed! A lot of the things I buy are paid for in installments – my phone, my tablet and sometimes other items as well. Especially with phones a lot of companies have 0% interest because they want to lock in customers – even IF the price drops then you’re better off paying with installments because of the way inflation works.

        1. Compared to paying entire sum right now, it’s indeed better to pay in installments. But you’re definitely not better off compared to buying a 6 months older model or a used version where the price has already dropped significantly or waiting for the price drop before making the purchase (i.e. waiting 6 months and buying a 6 months older model).

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