For the most financially savvy readers, the answer might be obvious. Before you read any further, what would be your answer?
Some time ago, there was a Reddit poll that showed how most people preferred the option of money over the years. Some answers reasoned that after 10 years, the second option would earn you an extra 200K.
But even if the monthly income represented the same amount in the end, I’m sure most people would still choose that option, which is curious given that a bird in the hand is worth two in the bush.
Opposite to Reddit, I’m not making a would-you-rather question here. I want you to dive deeper into this hypothetical exercise for you to learn why one option can be better than the other.
But first, let’s briefly dive into some economic concepts. Lack of knowledge about these concepts is what makes you make bad decisions when it comes to money.
If you don’t know what inflation is, you must have at least heard about it some time or the other. It’s a fundamental concept in economics, and understanding it is crucial for better financial education.
Think of it like this: you visit a supermarket, and 3 packs of your favorite cookies cost $10 today, but a decade later, those same $10 can only buy you 2 of the exact same cookies. You’re experiencing the effects of inflation.
In simple terms, inflation is the generalized rise in the prices of goods and services in the market economy over time. While inflation rates can vary in a given period, they tend to increase over larger periods, leading to a cumulative increase in price.
This also means that your purchasing power diminishes over time — you’ll be able to purchase less with the same amount of money.
This brings us to another important concept: the “Time Value of Money.”
The time value of money is closely tied to inflation and purchasing power. The money you have today is generally more valuable than the same amount (or even…