The only unsolved hijacking in U.S. history is also a great example of the Time Value of Money.
In 1971 a guy going by the name D.B. Cooper hijacked a Boeing 727 airliner, received a $200,000 cash ransom then disappeared forever after parachuting out of the plane with his cash somewhere over Oregon.
Nobody knows for sure if Cooper died trying to get away, or if he got away scot free but one thing is certain: $200,000 in 1971 is the equivalent of more than $1.2 million dollars today.
The Future Value of Money
The future value of money is a rule that says “the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.”
In plain English: a dollar today is worth more than a dollar tomorrow.
If you can buy something for a dollar today, tomorrow you can buy it for that same dollar plus a little something extra. That’s because cash loses value over time, therefore it takes MORE money in the future to buy items.
The Time Value of Money
Using a time frame of today and tomorrow doesn’t illustrate the point very well, but the principle is true nonetheless. Think about your grandparents. They probably bought their house in 1940 for a whopping $3,000, which was a lot of money at the time.
Now supposed that your grandparents, in addition to buying a $3,000 home, also scrimped and saved their whole lives, managing to save another $3,000 in cash.
In total they’d have $6,000 in assets:
- $3,000 in cash
- $3,000 in real estate
Not too shabby for the 1940’s but fast forward 70 or 80 years. That same house that Grandma bought for $3,000 in 1941 is worth a helluva lot more than $3,000, right?
Nice investment, Granny!
But what about that $3,000 life savings that they had hidden away in a coffee can in the attic of their $3,000 home?
It’s still worth $3,000. Bummer.uset
Cash loses value over time
The problem is that back in the day that $3,000 was A LOT of money. Huge money, and it went a long way.
It took your grandparents a lifetime to save that much cash and at one time it was enough money to buy an entire house. Today it probably wouldn’t even pay off your credit card bill.
That’s because cash loses value over time.
Use Today’s Cash to Buy Tomorrow’s Assets
And that brings us to the point of this post — your nest egg and mine.
If you’re simply saving cash and sticking it into a “savings account” at your bank then you might as well be sticking that money in your own tin can and hiding it in an attic.
It’s worth less money with each passing day, month, and year. But it doesn’t have to be that way. It’s nice that you’ve got it, but your money is just sitting idle – put that money to work.
Put Your Money To Work
Think of your money as a potential employee. Right now you have a lot of potential employees at your disposal. Probably hundreds, or even thousands of them – all just waiting to help you!
They’re called dollar bills and every single one of them is ready, willing, and able to go to work for you with the sole purpose of making you even more dollar bills. But your money can only make you more money under these five conditions:
1. A dollar will only go to work for its master. If you choose to spend your dollar, it can no longer work for you because you are no longer the master.
2. A dollar sitting idle in your pocket or checking account will become less valuable over time; your dollar must be put to work in order to make more money.
3. A dollar can only work for you if you put it to work. You do this by investing it in something like stocks, starting a business, or buying real estate. Dollars aren’t picky where they work, but they need to be invested in order to go to work.
4. Eliminating high interest debt is effectively an investment. If you’re paying more than 7% interest on a loan, then you need to generate more than 7% in growth, otherwise you’re dollars aren’t working as efficiently as they could.
5. Possibly the most important thing to remember when it comes to putting your money to work is the principal of compound interest. Ben Franklin said it best: “Money makes money. And the money that money makes, makes money.“
Cash might be king, but it also loses value every single day. If you’re trying to reach FIRE, you’ll get there quicker by putting your money to work.