Published April 15th, 2015
The ‘time value of money’ concept is critical to finance. It is the idea that $1 now is worth more than $1 at a later date in the future. This article is not about the time value of money… It’s about the money value of time.
Just as a dollar today is worth more than a dollar tomorrow, time spent now is worth more than time spent in the future. A simple example proves this: would you rather go on a vacation to your favorite place in the world in a few days (enough time to get packed and prepared), or in 10 years? For most people, the answer is simple – time spent today is worth more than time spent in the future.
On the opposite side of the equation, who would rather get dental work done now than 10 years later – if there were no consequences for waiting? As a general rule, spending time in an enjoyable manner now is worth more than spending time in an enjoyable manner in the future. Conversely, we’d rather put off spending time in unpleasant ways as long as possible if there are no consequences to this decision.
The Money Value of Time Doesn’t Like Reality
In isolation, the money value of time principle would have you save nothing and live for the moment – maybe even quit your job and experience everything you’ve ever wanted. This fairy-tale of an idea runs into serious real-world consequences, however.
If you quit your job and spent all your savings on wine, travel, and fine dining – or maybe exotic foreign adventures, fast cars, and cigars – the possibilities are endless – then there would be nothing left for when the savings invariably run out. There is a way to balance current consumption and savings for the future…
Compounding, Time, and Wealth
“The Most Powerful Force in the Universe is Compound Interest”
– Albert Einstein (quote author disputed)
Time is linear. We can either spend it now or later. Investing does not produce linear results, however. Investing (done well) provides a return on investment. This return can be reinvested – making money on top of money you did not previously have. Compounding wealth through dividend growth investing (the dividend snowball) changes the trade-off between saving now and spending now. Put simply…
Money compounds. Time does not.
Ultimately, the value of time spent depreciates as the temporal distance from a fun (or not so fun) event grow ever larger. This is why we are always looking forward to new events and new ways we can spend our time in an enjoyable way. When you think about it, that’s a very good thing. It’s the reason we aren’t satisfied – the reason humans as a species keep progressing rapidly (or at least one of the reasons).
We Are Not Ruthless Compounding Machines
Humans aren’t wired to focus solely on compounding wealth. Simply put, there’s more to life than a large investment account. What’s the point if it doesn’t do you, your loved ones, or society any good? It’s true that time is a depreciating asset while invested money compounds. What you do with that compounded money matters.
You can strike a balance between compounding money and maximizing the use of your time through building a high quality dividend growth portfolio. As you invest into the portfolio, it will slowly grow over time. At a certain point, the dividend income alone from the portfolio will cover all your living expenses. At this time, you are truly free – free to spend your time on what matters to you without being stuck in the doldrums of everyday work. You work because you want to, not because you have to.
Since compounding grows wealth exponentially through time, the earlier you start the dividend growth process, the better. At a 10% rate of return, $1 turns into $2.59 dollars in 10 years, $6.73 in 20 years, $17.45 in 30 years, and $45.26 in 40 years.
Living on Investment Income
The ultimate goal (in my view) of a dividend growth portfolio is to get to the point where you can live comfortably on the dividend income you receive from the portfolio. Investing in businesses with a very high likelihood of raising dividend payments year-in-and-year-out means you will likely see dividend income grow well in excess of inflation. As your dividend portfolio produces more than enough investment income to live on, one can use the proceeds for charity, a better life style, or anything else the mind can imagine.
Saving throughout life to build up dividend income takes advantage of the amazing effects of compound interest while still balancing creating special moments and living life. The goal of a dividend growth portfolio is not wealth itself, but rather a stable and growing passive income stream that allows you to experience the money value of time.
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