opportunity costs http://www.wisebread.com/taxonomy/term/14454/all en-US Why the Time Value of Money Matters, and 10 Ways It Affects You http://www.wisebread.com/why-the-time-value-of-money-matters-and-10-ways-it-affects-you <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-the-time-value-of-money-matters-and-10-ways-it-affects-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/cash-2285818-small.jpg" alt="cash and hourglass" title="cash and hourglass" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Learning some basic finance doesn't have to immediately make your eyes glaze over. There's one concept in particular, the time value of money (TVM), which is a fundamental principle in everything from investing to purchasing that becomes more interesting and easier to understand once you drop all the boring finance jargon. So to meet the challenge, here are a few brief descriptions, followed by 10 unexpected (and hopefully more entertaining) examples of the TVM. (See also: <a href="http://www.wisebread.com/7-places-teens-and-adults-can-learn-about-money">Places Teens (and Adults) Can Learn About Money</a>)</p> <h2>First Things First: What Exactly Is the TVM?</h2> <p>The time value of money means a dollar today is worth more than a dollar in the future because it can immediately generate interest. In finance world, if I get $1 today, I can immediately invest it to earn more money (finance world assumes there is always some safe place to earn interest). If I waited to get my $1 until a year from now, I would have missed out on a whole year's worth of earning interest. (See also: <a href="http://www.wisebread.com/the-psychology-of-money-how-a-t-shirt-equals-a-taco">How a T-Shirt Equals a Taco</a>)</p> <p>This also means money in hand today is a sure thing. It eliminates other risks, like default risk, which is when you are promised money in the future, and someone doesn't pay up &mdash; such as that friend you lent money to and who still hasn't paid you back.</p> <p>And let's not forget opportunity costs. These are essentially choices you give up to do something else. When you decide to wait one year to get your $1, the opportunity cost is the year's worth of lost interest that you gave up to wait for your $1.</p> <p>So, now that you are a financial whiz with these descriptions, here are ten ways to understand the TVM without the usual finance drudgery.</p> <h2>1. Picking Your Lottery Payout</h2> <p>When I win my Powerball $500 million jackpot, I intend to pick the immediate cash payout option instead of the 30 years of future annuity payments. Using the TVM, even though I will initially receive less than $500 million by doing this, I will still get a gigantic sum of cash upfront, which I can invest right away to make even more. I will also have immediate control of my money today, and I will avoid the risk that the lottery commission may not pay up for some reason down the road.</p> <h2>2. The Delicious Cupcakes in My Fridge</h2> <p>We are somewhat obsessed with cupcakes in our house, and rationing hasn't worked. It's clearly better to take your portion right away. Like the TVM, this is true for a couple of reasons. First, a cupcake today is worth more (in taste terms) than a cupcake tomorrow when it becomes stale and the frosting hardens. Also, waiting to get your share tomorrow risks that I will sneak into the fridge later tonight and eat your cupcakes, leaving you with nothing for tomorrow (cupcake default risk).</p> <h2>3. Designer Shoe Purchases</h2> <p>That awesome pair of designer shoes is finally on sale. You charge it to your credit card and celebrate all the way home. However, when you don't pay off your balance until six months later, those shoes really cost you more. That's the TVM at work. The six months of credit card interest charged by your credit card company for the &quot;loan&quot; they advanced you to buy the shoes gets tacked on. Pay off the balance right away, and you won't have to pay for the time value of money.</p> <h2>4. Professional Athlete Pay</h2> <p>Many professional athletes have pay packages that give them a promised amount over a set number of seasons. However, in some sports, if you get injured and miss games, you may forfeit future earnings. Like the TVM, if you can secure an upfront amount today (such as a signing bonus) instead of future payments in years to come, you are better off. Getting your money today eliminates future lost income from injuries (similar to default risk) and allows you to start investing your money for the future &mdash; assuming such athletes would do so.</p> <h2>5. Dinner or Shopping</h2> <p>This is an opportunity cost comparison that essentially turns into a TVM concept. You've saved up some extra cash, and since you're an awesome budgeter, you can either spend the money going out to dinner or choosing to buy a new shirt. The opportunity cost of choosing the shirt is the price and enjoyment of the dinner you give up. But, over time, that shirt can be worn again, thereby making this a better option for some. (See also: <a href="http://www.wisebread.com/12-cheap-first-date-ideas">12 Cheap First Date Ideas</a>)</p> <p>However, perhaps dinner out this week is a chance for a date with your dream guy or gal. In this case, the opportunity cost of dinner, which equates to the price of the forgone shirt and future wear, may be small compared to a lifetime of happiness with what could be your future husband or wife (as if it were that easy!).</p> <h2>6. Fine Wines</h2> <p>While I can safely say I am not a regular at fancy wine auctions, there are certain wines that improve with age, which may be worth a whole lot more in the future. According to<a href="http://www.wineeducation.com/invest.html"> WineEduction.com</a>, a 1961 Chateau Latour originally cost $3 when it was released and can now sell for $500 at auction. Much like the TVM and that $1 earning interest, such bottles are a similar example, even if I may never get to drink one.</p> <h2>7. Wimpy From Popeye</h2> <p>If you have never seen a classic <a href="http://popeye.com/history/">Popeye cartoon</a>, then break out your Google machine, because the character of Wimpy personifies the risk of a dollar promised tomorrow vs. getting a dollar today. Wimpy was in love with hamburgers, but never could pay for them. He always said, &quot;I'll gladly pay you Tuesday for a hamburger today.&quot; In other words, it was highly unlikely Wimpy was really going to pay on Tuesday or any other day for that matter. Thus, whoever gave Wimpy that burger should get his money in hand today because Wimpy was probably defaulting later.</p> <h2>8. Chore Procrastination</h2> <p>Here's an interesting way to equate the TVM into everyday chores. Nobody likes cleaning up, but you may be better off doing it today vs. putting it off until tomorrow. The mess will only grow if left untouched over time, and you will have to put more things away, scrub harder, and do a deeper clean later on. Channel your inner-finance self and realize it's like interest charges piling up. Today's mess grows over time, accumulating more dirt and junk, which becomes an even bigger mess down the road.</p> <h2>9. Exercise</h2> <p>You've heard that exercising and taking care of your body can make for a healthier future. Much like investing in a savings account today, which can yield interest and more savings for the future, investing in your body today through regular exercise can stave off injuries, prevent diseases, and yield future health benefits. If you wait to start getting into shape until you are much older, you forego the accumulated health benefits of exercise, just as you would forego any accumulated interest on your savings. (See also: <a href="http://www.wisebread.com/fitness-for-people-who-hate-exercise">Fitness For People Who Hate Exercise</a>)</p> <h2>10. Mowing the Lawn</h2> <p>Lawn services can be expensive, but perhaps you can feel less guilty with an opportunity cost comparison. It may take you one hour to mow your lawn, but a lawn service can do it for a fee of $20. If you are a freelancer and need to take an hour off from earning revenue to mow, then if you make more than $20 in an hour, it's worth having the lawn service do the dirty work.</p> <p>These not-so-mainstream TVM examples hopefully provide a more simplified way to think through this fundamental financial concept. Finance doesn't have to make you run for the hills if you can think of it in practical and more interesting terms.</p> <p><em>Can you think of any additional examples of the TVM at play in everyday life?</em></p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fwhy-the-time-value-of-money-matters-and-10-ways-it-affects-you&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FWhy%2520the%2520Time%2520Value%2520of%2520Money%2520Matters%252C%2520and%252010%2520Ways%2520It%2520Affects%2520You.jpg&amp;description=Why%20the%20Time%20Value%20of%20Money%20Matters%2C%20and%2010%20Ways%20It%20Affects%20You"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/Why%20the%20Time%20Value%20of%20Money%20Matters%2C%20and%2010%20Ways%20It%20Affects%20You.jpg" alt="Why the Time Value of Money Matters, and 10 Ways It Affects You" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/kelly-medeiros">Kelly Medeiros</a> of <a href="http://www.wisebread.com/why-the-time-value-of-money-matters-and-10-ways-it-affects-you">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/financial-math-basics-you-need-to-know">Financial Math Basics You Need to Know</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/tips-for-increasing-your-financial-literacy">Tips for Increasing Your Financial Literacy</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/do-you-know-these-5-financial-lessons-most-people-learn-in-their-40s">Do You Know These 5 Financial Lessons Most People Learn in Their 40s?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-did-your-parents-really-teach-you-about-money-it-might-surprise-you">What Did Your Parents REALLY Teach You About Money? (It Might Surprise You)</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-places-teens-and-adults-can-learn-about-money">7 Places Teens (and Adults) Can Learn About Money</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance financial education financial principles future value opportunity costs present value time value of money Fri, 06 Sep 2013 09:48:30 +0000 Kelly Medeiros 980987 at http://www.wisebread.com 4 Project Costs to Consider Before You Launch http://www.wisebread.com/small-business/4-project-costs-to-consider-before-you-launch <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/articles/4-project-costs-to-consider-before-you-launch" target="_blank">http://www.openforum.com/articles/4-project-costs-to-consider-before-you-launch</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/4-project-costs-to-consider-before-you-launch" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000001146718Small.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="159" /></a> </div> </div> </div> <p>It happens all the time. During a weekly (or daily) meeting, someone brings up something &quot;interesting&quot; he saw online or read about on the Harvard Business Review. &quot;Maybe we should try it.&quot;</p> <p>Sometimes one of these spontaneous ideas turns out to be an outburst of genius. It may solve an existing problem efficiently and economically. Or maybe it offers a new way to engage your customers. Other times, though, the excitement of something new leads us in pursuit of time consuming and costly projects that don&rsquo;t deliver.</p> <p>There's no doubt that today's landscape requires companies to move fast so they don't get left behind. But it's also important to be prudent about where you spend your resources. More often than not, the &quot;shiny and new&quot; feature that cost tens of thousands of dollars to build will become obsolete even before launch.</p> <p>Fortunately, there are four simple ways to evaluate whether a long-term,<a href="http://www.openforum.com/articles/3-common-project-management-pitfalls" target="_blank"> resource intensive project</a> is really going to be valuable when it's done.</p> <h2>1) Time Is Money</h2> <p>For every business, time is a cost. There may be opportunities that need to be passed on simply because you don't have the luxury of time. If your cash is going to run out in three months, but the project you want to take on is going to take five months, it doesn't matter how great the idea it is. Your company won't be standing by the time it's done. It's not just about whether you can afford to spend the money; you have to consider whether you can afford to spend the time.</p> <h2>2) Count the Opportunity Cost</h2> <p>The hard costs required to complete a project are easily inputted neatly into a spreadsheet.</p> <p>You can calculate how much new employees or freelancers will cost, as well as the tools needed and other resources required. What's more difficult to calculate (and often overlooked), is the opportunity cost. What are you giving up to pursue this project? Can you be building your company in other, better ways? What resources will be diverted from other areas to support this new feature or service? There are usually many options a business can choose from for growth. Is this the very best one?</p> <h2>3) Review Your Priorities</h2> <p>Small businesses rarely have the resources to do absolutely everything they could do to grow revenues and expand their reach. This is where priorities come into play.</p> <p>Pursue projects that are in line with priorities and high target goals. Don't get sucked into a sales pitch from the guy who's selling a large package of goodies that are just neat to have. Are there other things you can do that will more effectively meet your most important goals?</p> <h2>4) Don't Listen to the Squeaky Wheel</h2> <p>It's easy to get distracted by a new complaint or an inconsequential but &quot;loud&quot; bug. What's top of mind can quickly become an all consuming project that no one really cares about.</p> <p>Whenever a new problem becomes apparent, discuss it with the team, but remember to place it in the queue where it belongs. If it's a blaring bug that demands prompt attention, that's fine. But if it's not, let it go for now and get back to it when it's time.</p> <p>Keeping resources focused on your high target, high yield goals will produce the results your business needs. Stay away from the traps of pursuing projects that cost more than they're worth.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/lynn-truong">Lynn Truong</a> of <a href="http://www.wisebread.com/small-business/4-project-costs-to-consider-before-you-launch">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-4"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/250-tips-for-small-business-owners">250+ Tips for Small Business Owners</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-ways-to-build-business-credit-when-youre-self-employed">5 Ways to Build Business Credit When You&#039;re Self-Employed</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/20-cheap-and-easy-diy-kitchen-improvements">20 Cheap and Easy DIY Kitchen Improvements</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-grow-your-solo-business-without-hiring-employees">How to Grow Your Solo Business Without Hiring Employees</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Small Business Resource Center opportunity costs project management projects small business Sat, 13 Aug 2011 18:36:35 +0000 Lynn Truong 648831 at http://www.wisebread.com