What if I told you that money decreases in value over time?
Yup, you read me right (you can read that line again if you want to) – money decreases in value over time. This is what we call in accounting-ese the ‘Time Value of Money’.
There are many Big Economic™ reasons why money decreases in value over time but the biggest culprit is inflation – a general increase in the cost of goods and services over time.
As with all things technical – its best explained using an example:
Let’s say that 30 years ago, you could buy a kg of potatoes for $0.50. This means that your $1 can buy you 2 KG of Potatoes – that was some pretty amazing purchasing power back then. Now, fast forward 30 years later and we are living in the future! Now a kg of potatoes will cost you about $2 – meaning that the $1 you had before couldn’t even buy 1 KG of potatoes! It’s purchasing power has decreased and with it, its value! What a bleak, dystopian future we live in!
But seriously, it’s not all that bad as average wages have also risen over the years – but let’s say you held onto that $1 from 30 years ago and stuffed it under your mattress (or piggy bank, swear jar or money sock), that $1 would have been worth a whole lot less than what it was worth 30 years ago!
So what does this mean Sam? What do I do with the money that I’m saving away? If I’m a small business owner what do I do with my extra ca$$h?
The simple answer is to not stuff it under your mattress!
So imma leave you with some reaaaallly important advice here:
‘A dollar today is worth more than a dollar tomorrow’
What that means is that if you got money lying about you gotta use it!
If you are a small business and you have extra ca$$h sitting in your bank account (which you haven’t put aside for taxes!) you need to spend it! Bear in mind that you should have enough money to cover your basic expenses (power bill, rent, salaries etc.) first before spending on anything else.
Spend it on stuff to grow your business! Invest in some advertising to drum up some sales! Find a good business coach and pay them for some quality coaching! Buy a new van to transport your goods! Pay off some business loans! Whatever it is you want to spend money on, have a good think about the value it adds to your business. You don’t want to have cash sitting around doing nothing – because cash that does nothing is cash that is going to rot away and devalue over time.
If you are an individual and you have some extra cash lying around (say a tax refund came in – $$$). The same rules apply, you don’t want to have more than what you absolutely need to survive sitting in your everyday accounts. Obviously you will want to have some cash in reserve (in case of a rainy day) but beyond that, you should look at using that money!
From a financial perspective you can use that extra money to pay off some loans, save up for a house, invest in mutual funds (I’ll talk more about this in a future post). From a non-financial perspective you can invest in yourself – get a gym membership, learn a new language, buy a good book, save up for a trip etc.
Whatever it is that you do with your extra cash, don’t blow it on junk. Before you buy anything, ask yourself: ‘Does this add value to my life and/or my business?,’. If it doesn’t – don’t buy that crap.
You only get one shot to spend your cash – so make sure you spend it well!