# 2 – THE TIME VALUE OF MONEY

When I was a kid, a soda was 10 cents, wages were about .75 cents an hour, a regular new car was about \$2000, and a decent house \$10,000. Today the same soda is \$1, wages about \$7.50 an hour, a car about \$20,000, and a decent house about \$200,000. Has anything changed? Not really, even though everything is ten times more money, the ratio between the items hasn’t increased. When everyone said there was a real estate bubble, that \$200,000 house was selling for \$350,000, obliviously things were off balance, and they got adjusted back. It is now worth what it is really worth \$200,000. Nothing has changed, and like the sand at the beach eventually it all levels out.

If your \$200,000 house is worth \$400,000, then your \$20,000 car will be \$40,000. But if you had to pay for it in today’s dollars you are still poor. The trick would be to somehow carry that money back through time. Let us say I sold my \$200,000 house today, went back to 1970 and then I could buy 10 homes. Today I would have 2 million dollars in homes. The idea, of course, is ridiculous, but it shows the power of growth over time.

So instead lets save a dollar a day for 40 years. So that \$1 x 365 x 40 years, that is \$14,600. That is also called dollar cost averaging. You invest the same amount of money over time for a period of time. Fourteen thousand dollars is not much to get excited about, but it is better than nothing. Also think about the first \$1 a day for years was worth a lot of money, but over the time the value of that dollar is less. Change it to \$10 a day, and now you have \$146,000. However, it took you forty years to save it. And what is it going to buy in 40 years, a car? The point is, you can’t save your way to retirement.

Now let us invest our money in a bank CD. Typically they pay about the cost of inflation. So when Inflation is zero they give you something over it. The only way to get a good deal on a bank CD is during a period of high inflation that is then followed by a period of low inflation. Then you extend the CD term to as long a term as possible. Only this happen only once in a lifetime. Banks are simply not in the business of making money for you. Got that?

So back to the \$10 a days for 40 years using a bank CD. Now the math is a little more complicated, because the interest compounds on itself, which is greater, and the bank won’t take odd numbers on the CD, etc… At least this will give you an idea, and at least you’re not losing money.

So at the end of forty years you have contributed \$146,000 via \$10 a day. You made an extra \$34,000 via compound interest. If we are smart enough to put this money in IRA you would have saved the taxes on the income which would have killed you compounding interest by paying a third of it to the IRS. But still, for 40 years of saving money barely have enough money to buy a Toyota Corolla. Oh, I forgot to mention whatever part was tax dedeferred​ you will pay the taxes now when you take it out. So obviously we need to make more money over time tax free.

There are lots of ways of making more money. The old “Risk versus Reward”, and the peddlers of greed are out to get your money.

It is virtually impossible  to save your way to retirement. Not in today’s dollars.