When is a dollar not a dollar?

What if I told you that dollar coin in your hand is not actually a dollar? You will look at me like I am crazy. More so than usual anyway. If you would just give me two minutes to explain before judging me.

We can put our dollar to use in four ways: Spend, do nothing, save, or invest.

 

1/. Spend it/give it
How much is $1 dollar worth if we spend it? Zero

 

2/. Do nothing
If we were to hold on to the dollar or frame it on our wall, in 40 years’ time, our $1 would now be worth approximately 37 cents (assuming 2.5% inflation). A decrease in value of 63%.

 

3/. Save it
A 2.3% return after taxes in a savings account would see your $1 worth 92 cents in 40 years. A decrease in value of 8%. This is still a decrease in this example due to 2.5% inflation.

 

4/. Invest it
$1 invested at a rate of return of 7.5% after inflation and fees would be worth $18 in 40 years. A 1700% increase in value.

 

As you can see a dollar is not actually a dollar. We need to change the way we think about money. If we spend, frame, or save a dollar, our money will decrease in value over time.

If we invest, the future value of our dollar can be so much more. Our money is worth more now than it ever will be again. $1 dollar invested now could be up to $18 in 40 years. $1 invested in 40 years is just $1.

The effect can be seen even easier once we start punching in larger numbers. What if we invest $1000 today instead? In 40 years we should have approximately $18,000 without any further investing. Yes, we are making assumptions about investment returns, but the point is still the same regardless of returns of 3%, 5% or 7%.

That $1,000 spent on purchasing that TV, is potentially costing you $18,000 of your future money if invested instead.

Just a short one today to emphasise the importance of investing our money, instead of spending unnecessarily or simply saving it. Investing is necessary to beat inflation and earn positive returns. Everything else is just losing money.

 

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

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