What Is the Value of Money?

            Families, communities, and nations are stronger when individuals understand the time value of money and the “eighth wonder of the world. Once parents have a basic understanding of these values, they have a responsibility to teach them to their children. I recently had the opportunity to teach them to my granddaughter, and I was pleased at how quickly she grasped understanding.

            I began my lesson by reading the following scripture from Matthew 6:19: “Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt.” My granddaughter and I discussed how this scripture could have both temporal and spiritual meanings. Then I asked her to think of the scripture as she watched a video titled “Moth and Rust Doth Corrupt.” The video likens moths in a clothes chest to finances. It is an interesting and easy to understand video.

            Just as moths in a chest can destroy fine clothing, some savers will discover an enemy to their money. People saving for retirement must understand the time value of money and make wise investments to avoid this enemy – inflation.

            E. Jeffrey Hill and Bryan L. Sudweeks wrote in their textbook titled Fundamentals of Family Finance – Living Joyfully within Your Means: “Of the many principles of family finance, the key mathematical principle you should master is the time value of money (TVM)” (Emphasis included.) (2016, p. 16). They explained that the time value of the dollar is not stagnant, meaning that it does not stay the same. It is constantly increasing or decreasing due to influence from two opposing forces – inflation and interest.

            The authors defined inflation as “an increase in the price your family will pay for goods and services over time” (Hill & Sudweeks, 2016, p. 16). We are currently living in a period of higher inflation. The price of purchases today is 8.5 percent higher than it was at this time last year. This means that the purchasing power of $1,000 hidden under a mattress would be worth $85.00 less than it was one year ago. Inflation would be eating away at the time value of the $1,000 just like moths eat clothing when given the chance.

            Hill and Sudweeks defined interest as pertaining “to any use of your money that results in a return on investment” (2016, p. 16). In other words, interest helps money to grow. The authors compared interest to rent. “Just as tenants pay rent to landlords in exchange for the use of an apartment or house, people and institutions will pay you interest in exchange for the temporary use of your money” (Hill & Sudweeks, 2016, p. 16).

            The authors continued their explanation of interest and inflation as follows: “A dollar in hand today really is worth more than a dollar received in the future because you can invest that dollar today and begin earning interest on it. The sooner your money can earn interest, the faster your interest can earn interest, and the more money you will have” (Hill & Sudweeks, 2016, p. 16). This is a good lesson to remember in case you suddenly inherit wealth and wonder if you should take it in lump sum or regular payments: Take the lump sum and invest it!

            Albert Einstein is credited with saying lots of things, including the following: “Compound interest is the eighth wonder of the world” (Hill & Sudweeks, 2016, p. 17). Compound interest means interest earned on interest. When money is invested, it grows by earning interest. In the next compounding period, the initial investment as well as the interest already earned will earn interest. The amount continues to grow with interest being paid on the increasing balance.

            Interest is compounded at different number of periods – annually, quarterly, monthly, and daily, so it is important to know how often your investment will be compounded. The shorter the compounding period, the more your investment will earn. Money compounded daily will earn more than funds compounded monthly.

            The place of investment also brings different rates of interest. Hiding money under a mattress brings no interest. A bank savings account is secure but pays little interest. A government bond mutual fund is less secure but earns a little more interest. A broad, diversified stock market fund is less secure than bonds but earns higher interest. The higher the risk of losing money, the more interest the investment will earn.

A general rule is to keep money in a savings account if you will need the money in less than two years. If you are saving for retirement in thirty years, put your money where it will beat the rate of inflation. Currently, inflation is eating any money invested for less than 9 percent. A second general rule is to put a larger amount in more secure investments the closer you are to retirement. The authors suggested that you subtract your age from 100 and use the answer for the portion that should be in stocks: 100 – 33: 77% in stocks, 33% in bonds; 100 – 77 = 33: 33% in stocks, 77% in bonds.

The authors encourage investments, but they urge that several actions should be taken prior to making them. The first action suggested is to create a livable budget that will meet the needs of your family with money allocated for investing. The first “investments” that should be made are to create an emergency fund (enough to cover three to six months of living expenses) and to fill the pantry with three to six months’ worth of food.

            Wise parents will learn and understand the value of money and how interest works for us and inflation works against us. Then they should teach the principles to their children. My granddaughter was quick to understand the importance of earning more interest than the rate of inflation. Wise parents will gain a sound understanding about the value of money and how compound interest works in our favor, and then they can act in ways that will strengthen their family, community, and nation.