I have something I need to confess: I didn't really understand what you were talking about ten years ago when I sat in your Macroeconomics class and you said, "One dollar today is worth more than one dollar tomorrow." And worse yet, I didn't give a hoot about economics -- a friend told me you were a great prof, that it was good material, and that she'd help me (thanks, Liz!) so I signed up.
Of course, now I wish I'd been able to fully grasp the course content. I tried -- you had a photographic memory and would've noticed if I'd skipped class even one class. I studied hard, too. I think I received a B (you'd surely remember), but the material just didn't completely click. The main problem was that I had no real world experience with which to compare the concepts you presented. So I had to go and spend $40k to get an MBA with a finance concentration and literally force feed finance into my brain.
Now that I know more, I really appreciate what you were trying to do. All those graphs and charts with supply and demand make sense now; I get it! The only problem is, most people walking around (and voting... grr) don't, but I digress.
Please find below my blog on Time Value of Money, which is dedicated to you. (Just sorry I can't remember your name, especially since I know you'd remember mine.)
Yours,
LMF4HMW blogger
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Perhaps you've heard it to: "One dollar today is worth more than a dollar tomorrow." OK, sounds reasonable -- I'd rather have a buck today than tomorrow. I'd rather get paid today than tomorrow. (I'd rather buy the Brunello today... oops, not really, that would put me in the hole $100 :) Do you really understand the concept? And more importantly, why you should care?
The concept, Time Value of Money, is a basic premise of modern finance. In asserting that today's dollar is worth more than tomorrow's, we're making a valid estimate that by having the money today, we could accrue interest until tomorrow, next year, etc. It is an important concept because it affects the way you operate financially. We all know we want to pay lower interest rates on loans, and that we'd prefer a savings account or investment with a higher interest rate. This is also due to Time Value of Money.
In honor of tax season, let's examine a hypothetical duo of Janes and their differing approaches to paying taxes as an example:
Note: Jane is a single woman.
Jane Doe - like many of us, she wrote "1" (self) on her withholding form some time ago. She received a $2000 tax refund and is happy about it! Thrilled, actually, as Ms. Doe figures she would've "spent it anyway" and is glad to use it to pay down $1500 in credit card debt and treat herself with the rest.
Jane Duh - Ms. Duh set her exemptions appropriately when she started her job a few years back and knows she'll need to adjust them when she buys a condo in the next few months given the mortgage interest rate deduction. She's only expecting a minimal refund check, and is also thrilled.
Which Jane should be feeling thrilled right now? Hint: "Ms. Duh" ain't no dummy.
Confused? What's wrong with getting a fat refund?!! It's like finding $20 in your pocket, but better, right? NO. Why? Time Value of Money: Ms. Doe unknowingly gave Uncle Sam a $2000 interest-free loan in 2007. If she'd invested it like Ms. Duh in a money market account offering 5% interest, she'd have $2100 right now. The object of the game is not to overpay.
Note that it's unrealistic to assume that you'll net out at zero. Ms. Duh's "perfect score" of owing nothing and receiving nothing is for illustrative purposes only. What's important is that you examine your withholdings to get them to the point where you will either receive a minimal refund or even owe Uncle Sam a few bucks. Better him giving you an interest-free loan, right?
PS - what goes better than milk with Uncle Sam cake? Prosecco! It's affordable, light, sparkles and can handle a bit of sweetness.
1 comment:
just came accross your blog, I'm a fan. Keep it up and MANY thanks.
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