Now, I know most of you are familiar with the time value of money concept, but let’s do a quick refresher:
At it’s core, the time value of money is determined using the two formulas you see below, where “r” is the interest rate and “t” is time.
The important thing to know is that together, these formulas tell us a $1 today is worth more than the same $1 tomorrow. Why? Because inflation and lost investment opportunities cause the dollar to lose value over time.
More specifically, the future value formula allows us to figure out how much our money will be worth in the future if we invest it at a certain rate.
The present value formula helps us figure out what it would take to end up with a certain amount of money in the future. It helps us know how much, how long, and at what interest rate we need to invest.
In both formulas, the interest rate is the key driver of value over time.
Let’s look at what $100 looks like over ten years at different interest rates as an example.
After ten years, your $100 could be worth:
1. $77 with no investment and left at the mercy of inflation
2. $150 if invested at 5%
3. $250 if invested at 10%
4. $400 if invested at 15%
Doing nothing with $100 essentially costs $433 over ten years. Not a huge number, but most of us are dealing with much more than $100. I know this is over simplified, but it serves as a good example.
The $100 is our present value. In front of us, ready for the taking, are several future values. We can place our $100 under our mattress, or we can invest it at 5%, 10%, or 15% depending on the future value we want to achieve. Why wouldn’t we go for the $400 if it is a viable option? We’d be crazy not to choose that investment option. The only reason I can think of is that we can’t spare the money for 10 years. We may need it sooner. We may need it now. That is understandable.
This is where we leave the money example, though. I’m not just talking about money, I’m really talking about your value and my value over the next ten years. I’m talking about our present value and our future value.
Let’s look at our value at work over time as an example.
Just like we have various investment options with money, we have various investment options with ourselves. Our personal investment options fall into four categories:
1. Checked out
4. Investment (squared)
I worked with a man who had been in the same role for 18 years. Over the 18 years he was offered promotions and more responsibility but he turned them all down. He was stuck on old programs and technology and did not learn as quickly as new hires. He also didn’t want his job description to change, which it naturally needed to over time. Was he worth more after 18 years than he was when he started? Absolutely not. 18 years of annual merit increases (not based on merit by the way), Christmas bonuses, awarded vacation days for longevity with the company…he was way over compensated. He was worth much less than he cost. He created less value than he consumed. You don’t have to be in the same role for 18 years to cost more than you add. How many co-workers have you seen that are completely checked out, doing nothing but the minimum required to keep their job if even that?
These people go where the road takes them, and then look back and say, “see how far I have traveled?” Working as a content manager for eight years is not an accomplishment by itself. Surviving is not adding value.
These are your star players. I worked for a manager that invested in himself regularly to keep his skills sharp, to stay knowledgeable about his trade. He consistently looked for ways to develop people around him and raise his hand for work he saw as valuable to the company. On a smaller note, he took the time to use a calendar so he was never late to a meeting and never missed a deadline.
There is no limit to the amount of value we can add. Just when you think you are a star player, you’ll meet someone better than you. We don’t all have to be at this level in all areas of our life. It is healthy to recognize that some people are better investors than we are, and that is okay. But, it is important to learn from them and make wise investments ourselves. Chances are, we will be in this category far more than we think.
Again, the rate at which we invest is the key driver of value- just like in the time value of money. There is no limit on what we can achieve with smart investments.
The key to creating more than we consume at work, and in other areas of our life, is to be mindful of our present value and what investments we’ll need to make to reach our desired future value.
If you continue working as you are, where will you be in 10 years? Will you be happy with that?
If you want to be a Director or VP in 10 years. What do you need to do to get there?