A man wins $5,000 in a contest. He can take all $5,000 now or take payments of $1,000 a year over the next five years.
Which should he do? Does it matter?
The short answer is – “Yes, it does matter.” It matters because of a concept called the time value of money. This moves us to a longer answer. It is an answer of understanding how different investments affect the value of money invested given their returns and time invested.
A certain amount of money is worth more today than it would be in the future. It only seems wise for our contest winner to take the $5,000 now than to wait five years. It is possible because of the inflation rate that $5,000 today may only be worth about $4,600 in five years. So, all things being equal, he probably should take the money now.
The dilemma of the contest winner helps us see a parallel in considering today’s investments. What is the five year goal of a $5,000 investment today? This question shows the importance understanding the value of an investment today. It also leads us to consider the potential future value of investment returns that may be considered in order to meet future financial goals.
*This article is provided for informational purposes only and should not be construed as individualized investment advice. Please contact Atlanta Wealth Consultants for more information.
