The Time Value of Money Discussion Paper

Week 1 Discussion

What is Money Worth

Time value of money is an important consideration when making financial decisions. For instance, money is useful for making immediate transactions—but if one holds onto cash too long, what happens to the value of the dollar over time? An historical chart shows perfectly well what happens: it loses value substantially. Thus, to maintain the value of one’s wealth it is important to think about alternative investments that keep track with the rate of inflation—assets such as precious metals or real estate. There are also risk assets, such as equities. Even still no investment is risk free and bubbles blown today in markets can pop tomorrow. This happened in the gold market a few years ago. The equities markets have yet to pop in any meaningful way, but that does not mean they won’t. And real estate values plummeted in 2008 when the housing bubble popped. In short, cash may lose value of time—but other assets can lose value quickly and all at once in market downturns.

For this reason, diversifying one’s investments are necessary. As Northwood and Rhine (2018) point out, “having access to mainstream financial services can help” people learn what their options are (p. 317). And as Valaskova, Bartosova and Kubala (2019) show, many investors are irrational when it comes to making investment decisions. Scarcity and liquidity are issues that should be discussed with families so that they understand risks that are attendant with investments when one is seeking to make the right financial decisions (Cook & Sadeghein, 2018).

I would make investment decisions based upon an understanding of liquidity, how scarce an asset is, and whether inflation is likely to rise in the coming years. Judging from the Federal Reserve’s recent Repo actions and the indication that more quantitative easing is waiting in the wings, getting money into assets like gold or real estate would likely be the best way to hedge against losses in the time value of money.

References

Cook, L. A., & Sadeghein, R. (2018). Effects of perceived scarcity on financial decision making. Journal of Public Policy & Marketing, 37(1), 68-87.

Northwood, J. M., & Rhine, S. L. (2018). Use of bank and nonbank financial services: Financial decision making by immigrants and native born. Journal of Consumer Affairs, 52(2), 317-348.

Valaskova, K., Bartosova, V., & Kubala, P. (2019). Behavioural Aspects of the Financial Decision-Making. Organizacija, 52(1).