Friday, April 22, 2005

Time-value of Money vs. Money-value of Time

During our networks/engine revision today at s15, we were digressing onto the subject of what we should do with our spare time next study-year (to work while studying, or to just slack the time away doing only our FYP), and this further digressed into the topic of 'Time-value of Money' (or power of compounding) where we noticed some quite interesting points on it.

Eu, being the money-savvy guy that he is, noted to me the financial paradigm that has held for centuries and will do so for many moons to come: a dollar saved today is 64 dollars, 30 years later. So that means if you skipped the 1-dollar ching teng @ Biz. Sch (You can get a bowl @ 70-cents at Science Canteen.) now, you can have 64 bowls of ching teng 30 years later. Or not buying that 1 pair of Tevas now will get you 64 pairs of Tevas, 30 years later. Or not buying that nice MP3 player you are eyeing now will get you... ok, you get the point. Delayed gratification is the essence here.

Granted that's not really true, if you add in inflation - maybe not 64 bowls of ching teng, but 35 bowls? I'm taking a wild stab in the dark here. But the advantage of delayed gratification still stands.

Point being that we should try to save some money (by working, or by scrimping, or by not going on holidays) while we are still young, to enjoy the fruits of our labour 30 years later, when we retire. That extra 34 bowls of ching teng may just come in handy 30 years later.

But what about the value of money now?

Sure, 1 ching teng (referred as CT from now on to save my typing efforts geometrically) may be 35 CT later, but is that 35 CT worth as much as the 1 CT now? Of course it is, materially, but I'm talking about what that 1 CT mean to you now - when you are still a student mugging your life away studying [and not blogging(?)], when nothing less than that CTs will satisfy your immediate needs (not even that goreng pisang!). Will 35 CT bring you that same amount of enjoyment, 30 years down the road? Is it really worth it to forgo the one CT that you value highly now, in exchange for 35 CTs later, when you're probably well off enough to dine at chinese restaurants without flinching too much?

If all thesevCTs are getting on your nerves – too bad. CT is my currency of choice, so let's move on.

If 30 years down the horizon seems to far out for your imagination, let’s shrink it down to 5 years down the road. Using the very conservative mathematical logic of doubling your savings every 5 years through wise investments, your CT now grow to be 2 CTs 5 years later. Looking at the poor starving scrimping student who sees CTs as a prized commodity in life that I am now, and imagining myself 5 years down the road in that spiffy suit, working that cushy job, driving that power car, sipping that $3.50 Coffee Bean Latte - 2 CTs wouldn’t seem to matter that much then. Well, even if the power car seems a bit far-fetched, the Coffee Bean Latte should still be quite within my means. And if you don’t think Coffee Bean’s latte doesn’t cost $3.50, it’s because I’m a poor starving scrimping student who doesn’t hang out at Coffee Bean’s.

If I were to trade in my latte then for a 70 cents kopi, that would mean a savings of $2.80, equivalent to slightly more than 4 CTs, double that what I would have saved from delaying that ching teng when I was a poor starving scrimping student in NUS. In essence, to keep myself within the good effects of compounding interests, I could delay my delaying of gratification to a later time, and enjoy higher values now (as compared to the later time)!

I’m not saying saving money is no good. It always is. Rather, it is whether the efforts at saving justify the value of savings. It really doesn’t make sense walking a mile to save a bus trip (unless you derive entertainment from it), saving on a CT, holding a pee to find a free-of-charge toilet... as etc, if it requires extensive efforts on your part to do that. If the cost-savings aren’t high enough, don’t bother. Flush that toilet if it smells (no need to save water).

All this being said, I don’t think I will be working next year during the semester, unless I get a fun job that I really enjoy. Assuming I get a $5/hr job, and comparing this to a $25/hr job when I graduate, 25 hours of my time spent working next semester will be equivalent to 5 hours of OT when I graduate. I would rather utilize that 25 hours pursuing something I enjoy now, and spend 5 hours doing OT later on. I like doing OT anyway.

Right now, I’m thinking of activities I have long delayed – archery, kayak, hiking, dance (from Sien), photography, and a bit of piano. =)

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