I agree with much of what you’re saying. I make similar back of the envelope calculations.
One small point of clarity is that “money is worth less in the future” is not a general rule but a function of inflation which is affected strongly by national monetary policy. While it likely won’t change in the USA in the near future, it COULD, so I think it’s important to recognize that and be able to change behavior if necessary.
Lots of people attend an elite college because of signalling, not because it’s an investment. Keep questioning the value of such an education!
One small point of clarity is that “money is worth less in the future” is not a general rule but a function of inflation which is affected strongly by national monetary policy. While it likely won’t change in the USA in the near future, it COULD, so I think it’s important to recognize that and be able to change behavior if necessary.
I’m sorry I didn’t explain that well enough. WHat I meant is money you are going to get in the future is not worth as much as money you are going to get now. Even if we work with inflationless dollars, this is true. It happens because the sooner you have a dollar, the more options you have as to what to do with it. So if I know I am going to get a 2013 dollar in 2023, that is worth something to me because there are things I will want to do in the future. But would I pay a dollar know to get a 2013 dollar in 2023? Definitely not, I would just keep my dollar. Would I pay 80 cents? 50 cents? I would certainly pay 25 cents, and might pay 50 cents. If I paid 50 cents, I would be estimating that the things I might do with 50 cents between 2013 and 2023 are about equal in value to me, right now, with the current value I would place on the things I might do with a $1 in 2023 or later. The implicit discount then for 10 years is 50% if I am willing to pay 50 cents now for a 2013 $1 in 2023. The discount rate, assuming exponential change in time as all interest rate calculations do, is about 7%. Note this is a discount in real terms, as it is a 2013 $1 value I will receive in 2023. In principle, if inflation had accumulated 400% by 2023, I would actually be receiving $5 2023 dollars for a 26%/year nominal return on my initial investment, even though I have only a 7%/year real return and 21%/year inflation.
“money is worth less in the future” is not a general rule but a function of inflation
That is only partially true. The time value of money is a function not only of inflation, but of other things as well, notably the value of time (e.g. human lives are finite) and opportunity costs.
In fact, one of the approaches to figuring out the proper discounting rate for future cash flows is to estimate your opportunity costs and use that.
I agree with much of what you’re saying. I make similar back of the envelope calculations.
One small point of clarity is that “money is worth less in the future” is not a general rule but a function of inflation which is affected strongly by national monetary policy. While it likely won’t change in the USA in the near future, it COULD, so I think it’s important to recognize that and be able to change behavior if necessary.
Lots of people attend an elite college because of signalling, not because it’s an investment. Keep questioning the value of such an education!
I’m sorry I didn’t explain that well enough. WHat I meant is money you are going to get in the future is not worth as much as money you are going to get now. Even if we work with inflationless dollars, this is true. It happens because the sooner you have a dollar, the more options you have as to what to do with it. So if I know I am going to get a 2013 dollar in 2023, that is worth something to me because there are things I will want to do in the future. But would I pay a dollar know to get a 2013 dollar in 2023? Definitely not, I would just keep my dollar. Would I pay 80 cents? 50 cents? I would certainly pay 25 cents, and might pay 50 cents. If I paid 50 cents, I would be estimating that the things I might do with 50 cents between 2013 and 2023 are about equal in value to me, right now, with the current value I would place on the things I might do with a $1 in 2023 or later. The implicit discount then for 10 years is 50% if I am willing to pay 50 cents now for a 2013 $1 in 2023. The discount rate, assuming exponential change in time as all interest rate calculations do, is about 7%. Note this is a discount in real terms, as it is a 2013 $1 value I will receive in 2023. In principle, if inflation had accumulated 400% by 2023, I would actually be receiving $5 2023 dollars for a 26%/year nominal return on my initial investment, even though I have only a 7%/year real return and 21%/year inflation.
That is only partially true. The time value of money is a function not only of inflation, but of other things as well, notably the value of time (e.g. human lives are finite) and opportunity costs.
In fact, one of the approaches to figuring out the proper discounting rate for future cash flows is to estimate your opportunity costs and use that.