The Money Illusion (I): Understanding the Impact of Time and Value on Your Finances
Ini-Amah Lambert, mMBA
I help busy professionals earn passive income and build wealth thro venture capital investing, stock markets, and crypto || Equity Research & Portfolio Management || Content/Business Plan Writer for SMEs, Start-Ups
What is Money Illusion?
Money illusion is a false sense of wealth that occurs when people focus on the amount of money they have without considering their purchasing power.
It is a cognitive bias where people fail to consider the effects of inflation on the purchasing power of their money.
Let's define some concepts before we take a deep dive into the topic at hand so that we can establish a common understanding:
What is Cognitive Bias?
Cognitive bias means that sometimes our brains make us believe things that are not true.?
Our brain takes shortcuts and does not look at all the information before making a decision.
This can make us think something is good or bad when it might not be.?
This is a result of the influence of the neural pathways in our brains, which are the connections between different areas that allow us to process and make sense of information.
Neural pathways can become strengthened over time through repeated use. This makes it more difficult to consider alternative perspectives or information that contradicts our existing beliefs or opinions.?
This pattern leads to cognitive biases, where we rely too heavily on certain neural pathways and fail to consider other relevant information.
This is how beliefs, traditions, and ideologies are formed, upheld, and passed down from generation to generation.
What is Time?
Time is the ultimate resource—the source of all other resources. It is the only true currency that allows us to invest in ourselves and our futures.
When it comes to currency, we often think of money as the primary form of currency that we use to buy goods and services. However, in reality, time is the only true and real currency that we have.
Without time, we cannot create or accumulate wealth, build relationships, or pursue our goals and dreams.
Time is the great equalizer.
Each day, we are given a precious allotment of 24 hours, with which we can choose to do as we please.
We exchange our time for money by working and earning wages, and we can also invest our time in various activities and pursuits that can yield dividends in the future.
At their core, conventional currencies don't have inherent value. They are mere government decrees, which is why they are called "fiat currencies," and can be created or destroyed at the whim of those in power.
Unlike your country's currencies, like the dollar, naira, pound, yen, and euro, time cannot be created or destroyed. It simply is.
Time, on the other hand, is a universal constant that continues to tick away, regardless of our desires or intentions.
Understanding the Time Value of Money
The "time value of money" refers to the idea that money today is worth more than the same amount of money in the future due to factors such as inflation and opportunity cost.
Money illusions can cause us to overlook the impact of the time value of money on our finances, which can have significant consequences in the long term.
Recently, I was invited to speak at a men's fellowship on the topic "How to Create Your Personal Economy Via the Capital Markets."
I started by trying to highlight how cognitive bias can affect their financial future.
Our money ideology is a function of our upbringing and the environment in which we have been raised since birth.
You subconsciously picked up these patterns from your parents, family members, friends, and the environment around you.?
The neural pathways got strengthened, and they became subtle programming that is responsible for how you handle your finances.
This programming forms your cognitive bias.
To build wealth, you have to recognize the influence of these neural pathways: warped money patterns.
You can take deliberate, intentional steps to remove that programming and replace it with empowering financial programming.?
By so doing, you open up new pathways and lessen the influence of cognitive biases on your decision-making by actively working to challenge your assumptions and beliefs.
In this article, I will be talking about the time value of money in terms of three types of money illusions:
Cash Illusion
In the Parable of the Talents told by Jesus, it is often so easy for us to also see where the third servant failed, in retrospect, relative to the other two servants.
But a lot of us are not different from the third servant.
There are people who "invest" their money in their savings accounts.
Each time there is a transaction and they get the transcript, they just gloat over their fat bank balance.
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Your salary and business profits are not meant to be stashed at the bank. They are your seed capital for wealth accumulation via passive income.
That $10k balance you see in your transaction alert is not even sitting there at the bank in reality.
Your bankers have given it to the other two servants, who are more enterprising than you, to do business with.
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Your bankers and enterprising servants make profits and amass wealth as you keep funding them.
You get nothing.
The truth is, the value of money decreases over time, thanks to the Law of the Time Value of Money.
The Concept of the Present Value of Future Cash
If you want to know whether leaving money in your bank account is a good decision compared to investing it, one way to find out is through the concept of present value (PV).
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The PV of your $10k is the amount you will get, say, 1 year from today (if you need the money), adjusted for the interest you would have earned had you invested the money in bonds or stocks.
PV = DF * $10k----------------(Equation 1)
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This adjustment is done by using a proper discount factor (DF):
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DF = 1 + [1 + ROI]-------------(Equation 2)
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Let's use the interest rate on the FGN Savings Bond of 10% as the discount factor. (''The interest you would have earned'': This is your opportunity cost.)
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DF = 0.909----------------------(Equation 3)
So it is easy to know exactly what your money in a savings account today will be worth this time next year if we plug Equation 3 into Equation 1.
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PV = 0.909 * $10k
??????= $9.09k
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That means that the $10k balance you have today will be worth $9.09k in just one year if it stays in your savings account.
The longer you let your money sit in a savings account, the less it's actually worth.
Am I saying you should not have savings?
No.
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As long as you have a stable, reliable income, you should be fine with an emergency fund of between 3 and 9 months' worth of your basic monthly living expenses. (This considers basic needs only. No luxury, leisure, or entertainment expenses are included.)
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If you have more than this sitting idle in your savings account (even though, in reality, your bankers are helping you do business with your money to create wealth for themselves, their families, and investors), you are committing an economic and financial crime against yourself, your household, and posterity.
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It's time to take action and start investing your money in a way that will create passive income and ensure a more secure financial future for you and your family.
Opportunity Cost Illusion
What is Opportunity Cost?
Opportunity cost is the value of the next-best alternative that is forgone or sacrificed when choosing between two or more options.
It refers to the potential (future) benefits that are given up when choosing one option over another.
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When we make decisions, we go for one thing of value and give up something else.
It is the VALUE (not the COST) of the alternative we give up that is known as the opportunity cost.
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Also, opportunity costs can be inconsequential or significant, short-term or long-term.
There is an opportunity cost in every situation in which we have to make a choice or take a decision.
For instance, if you have $10 to buy either fish or beef for your cooking, and you opt for beef, the opportunity cost here is the fish (not $10).
The fish is the value. $10 is the cost.
Many people are aware of this kind of inconsequential opportunity cost scenario.
Other examples of inconsequential opportunity costs include:
?? Choosing biscuits over chocolate.
?? Picking up ice cream and giving up shawarma.
?? Opting for the movies instead of the beach.
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However, there's a twist:
If you have $10 to buy either fish or beef for your cooking and you opt for beef. On your way back, you notice a sales promo for able-bodied fish that usually sell for $10 going for just $5 each.
The opportunity cost here is the two fish (not the $10).
Got the drift?
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The opportunity cost is not the amount of money spent on your chosen option. It is the (future) value of the alternative item or expenditure you did not choose or could have made.
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As you can see, opportunity cost has far-reaching effects beyond just what is in your domain of knowledge.
Consider the social media post clipping shown below.
Imagine if his father had used that money instead to invest in real estate or the stock market.
That year was the same year that Nestle Nigeria started building its factories at Agbara. The company's share price at that time was not up to N20.
Today, as I write this line, Nestle is trading at over N1,000 per share.
Let's assume, for the sake of analysis, that he bought the G-Wagon for N1 million in 1981.
That N1 million would have given him 50,000 shares of Nestle back then.
Today, the value of that single investment would have been over N50 million. (This hypothetical analysis doesn't even take dividends into account.)
So, the opportunity cost of that G-Wagon is the Nestle shares. Do you get that?
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Imagine you earn a $2k productivity bonus at your organization, and your colleague buys a piece of land while you buy a personal car with your bonus.
Fast forward 3 years, and your colleague's land is now worth $10k because a major real estate company has moved into the area, speeding up the development of the suburb.
This implies that $10k is the opportunity cost of your decision to buy the car. In other words, the car cost you $10k, not $2k
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Understanding this concept of opportunity cost will let you make informed decisions.
Knowing what you're settling for and what you've decided to give up for your choice allows you to take full responsibility for your choices.
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Family Curse Illusion
Some poverty patterns in some families that are ascribed to evil ancestors or the devil are simply a function of the disempowering money beliefs I talked about earlier.
These age-long beliefs were handed down by ancestors right from the Stone Age to the Agrarian Age to the Industrial Age, and the offspring lives by them till date.
They wouldn't even know that their programming is the source of their problems until they read articles like this.
Now, this is not to say that there are no evil-oriented family courses in some African families.
I am saying that some people's evil family pattern may be financial illiteracy if they investigate without the lens of their cognitive bias.
Knowledge, they say, is power.
As you read this part, you can see that the power to break away from bad family money patterns resides with you, not in olive oil.
Sometimes, daily burdens might keep people from planning for the future of the next generation.
Many people feel forced to get a job they do not enjoy. Their toil wearies them.
Because that's all they know: go to school, get good grades, land a great job, become rich, and enjoy your pension.
While there is nothing wrong with that process itself, becoming wealthy and transferring wealth from generation to generation have to do with what you know and do when you land a great job.
It is not about the size of your paycheck. It is your mindset and the process.
Your great-grandfather did not teach your grandfather about money. He didn't know either. Or, maybe he just handed over the ones he knew.
Your grandfather maintained that pattern. Your father did not also learn about the new rules of money. He did not teach you about money and investing.
You have picked up the pattern naturally without thinking about it.
Why not plan ahead and give your children a better chance of having the option to choose a job they enjoy?!
You can choose to break the mould, bypass the old neural pathway, and form a new, empowering pattern for your family and generations after you.
It begins with you.
The Wallenberg Family Pattern
Financial intelligence and investing knowledge today can prevent your great-grandchildren from seeking deliverance against ancestral poverty and evil family patterns tomorrow.
As we speak, the sixth generation of the Wallenberg family in Sweden is undergoing training to take over the affairs of the family business.
They own about 40% of the stock market in Sweden.
To put this in perspective, they make more money than Nigeria.
One person started it. One person planted that tree about 200 years ago.
Once you are born, your fate as an entrepreneur and wealthy person is sealed.
That is a good family pattern.
Knowledge is Deliverance
One of your greatest investments today is to teach your children about money and investing.
This way, they can hit the ground running from the first day they start earning active income. And even if you leave a modest portfolio for them, they can build on that.
...to be continued