Time Value of money

T Walton on Flikr

So what is worth more a dollar today or a dollar tomorrow? It seems like a dollar should be a dollar, why would it change from day to day? The thing is that it does, maybe not noticeable in a day - but dollars have this interesting thing they can do, they can be invested and propagate. This is what the time part of the title refers to. Over time that dollar gets more and more valuable.

Inflation adjusted value

Photo by polckadot

When you see a number in an old book have you ever been flabbergasted at how low that number was? I was reading a book and there was a point where a piglet cost 50c and I was trying to figure out how it could be that cheap. Well the thing is those books were written a long time ago and over time that long time increases how much things cost. So how can you compare these prices over time? That is where you adjust something for inflation.

What is too good to be true

Have you ever had someone pitch you on an 'investment' and it sounds a lot more like a lottery ticket? The thing is that we are hard wired to want crazy high returns - buy low sell high, if you'd only bought bitcoin when it was 10$ and then got out at the top of the craze.  How many shares of Facebook would you need when it was an IPO to never want money again!

Rule of 72

The Rule of 72 is a way of quickly computing how long money will take to double given any compound interest rate. You take 72 and divide it by the interest rate and the number you get is how long it takes to double.

You probably have seen this about stock market returns someone probably wrote something like: "The stock Market Returns are 9% so by the Rule of 72 it will take 8 yrs to double."

What they are saying if we were to write it out all mathy would be given any amount of money X with a certain amount of interest 9% will take how many years to be 2 times as big?
(X * 1+ .09)^years = 2X

Year 1	1.09
Year 2	1.1881
Year 3	1.2950
Year 4	1.4116
Year 5	1.5386
Year 6	1.6770
Year 7	1.8280
Year 8	1.9925

Sequence of returns

Year	S&P 500	3-month T.Bill
2013	32.15%	0.07%
2014	13.52%	0.05%
2015	1.38%	0.21%
2016	11.77%	0.51%
2017	21.64%	1.39%

Sequence of returns typically has the word risk added to the end of it. Sequence of returns risk. Sequence of returns is thankfully named like what it is - a sequence or series of money or returns. So a sequence of returns might be for something like the stock market where each year the amount of money you get fluctuates with the market.

The 4% rule and the Shiller PE ratio

People pursing FI (Financial Independence) use the 4% rule to determine when they can pull the trigger for retiring. The problem with that is that the  4% rule is applying for retiring in a random year. When you target a number to retire on the year you retire on isn't random. I'm going to repeat that it's important. When you target a number you are no longer choosing a random year. The 4% rule is predicated on the fact that you are retiring at a random point, when you use a number to retire on the years where the market is up is where your stock is worth the most and when you are closest to hitting that FI number.

Starting Point - Average College Grad

Flikr - GotCredit.com

Starting out can be tough, you've been doing all this studying and jumping through the societal hoops to prove your a valuable. You get this college a degree a fancy new job but you don't have the house, or the nice car, and your parents are asking about when your planning on having kids. Everyone is pushing you to keep up with the Jones' and the Jones' kids.

So lets dig into it.

Starting Point - Average Household

Starting out a bit latter than a college grad, choices got made. Jobs, houses, habits are a bit more set in stone. 

  

The average yearly income of $74,664 before taxes, according to the Bureau of Labor Statistics' (BLS) 2016 Consumer Expenditure Survey.

Going Infinite

The rate that resources accrue is faster than the rate that resources are spent. We typically view this from the perspective of wealth, and with no further action needed on the part of the entity going infinite. If you have to work to maintain the accrual and this work cannot be done by an 80 yr old monkey than it's not really infinite.