We’ve all heard the expression “Time is money,” but have you ever really stopped to think about what that famous saying actually means?

What do banks, real estate mortgage investors, and the lottery all have in common?

They understand how the diagram above works and how the value of money changes everyday.

As an entrepreneur, it’s important to understand how and why the value of money changes. Can you get by without understanding it, probably. But just like the book Rich Dad, Poor Dad tells us, if you want to be rich, wealthy, successful, etc., you have to model the people who are.

Don’t you think Donald Trump knows about the time value of money? If if does, don’t you think you should as an entrepreneur? The more you know, the more you can use it to your advantage.

The value of money changes for a number of reasons, but here are a few to paint the picture for you.

• Inflation Cycle - As the price of “stuff” increases (gas, food, cars, houses, etc.) employees demand higher wages. This in turn cost companies more money to produce their products and that in turn is a reason prices for “stuff” goes up. When they go up too much, employees again demand more money . . . and the cycle goes on and on.
• Uncertainty - You never know what tomorrow brings. You could die, get a divorce, war, fire, flood, alien attack . . . sorry, just sounded good there.
• Lack of Patience - People want what they want now. They don’t want to wait 3 paychecks down the road. Businesses recognize this and profit from it. You might pay $6,000 for that car on paper today but the finance charge is making you actually pay even more for it. This again is the Time Value of Money at work.

In the opening statement of this article I mentioned how banks, real estate mortgage investors, and the lottery all understand the time value of money. Here’s what they have come to understand. Let’s look at the lottery industry as an example.

The Lottery

Many big money lotteries give winners the option of either taking one lump sum of money today or to receive payments over time (yearly, for example). If you want to receive your money in one lump sum, however, there’s a catch - you have to accept less money than what you actually won. Why do they do this? Why do they give you the option?

They do this because they understand how the value of money changes.

You see, if they gave you the lump sum today, they would actually give you the full jackpot. But if you receive the money over time, say final payout is in 30 years, they will have paid you less money.

That’s because that $100,000 final check they give to you in 30 years will be worth less and buy you less than it would be worth or can buy today. Gas in 30 years might be $20/gallon. Milk might be $15. Minimum wage may be $50/hour.

Therefore, that $100,000 is not worth what it is worth today. Make sense? The lottery is saving money by doing this.

Mortgage companies make use of this as well. If they didn’t charge interest on a $200,000 loan, not only would they not make money but they would lose money. Just like in the example above, in 30 years when you make your final $555 monthly payment to them that $555 would be worth less then than it is now.

How can you use this? Will it affect what you do with your money? Think about it.

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