Common Misconceptions: Time Equals Money

Everyone's heard the saying "Time equals money." It's often very true: More time working means more pay; putting time into a business means you'll (usually) make money; and taking time away from a person means that he won't be able to make money in that time period. Essentially, time almost always equals money.

But in the finance world, this isn't always true. Sure, you can deposit your money into a savings account, and over time, you will earn interest. However, you really won't make any money. Why? Well, inflation sets in and all that interest doesn't truly add any money to your pocket. If that idea has your head spinning, let me clarify below.

What is Inflation?

To start, we need to look at inflation. If you look back in history, smaller amounts of money bought more stuff. Fifty dollars in groceries ten years ago could buy you an entire cart full of food. Nowadays, you're lucky if fifty bucks scores you a few bags worth of groceries. This trend that makes our money worth less is called inflation...which is not always a bad thing.

Inflation does make the cost of the items we purchase higher, but it also drives businesses to hire more employees. In fact, inflation at a low rate is considered good for the economy; it keeps our unemployment low, encourages banks to lend, and encourages people to invest.

When Interest Isn't Really Money

So, inflation is a good thing, right? It keeps our economy moving, and it's an integral part of our financial world as we know it. However, a gentle rise in inflation over time means that the money that we save is worth less.

For example, let's say you've put $100 in savings to save for a $105 TV. Your interest rate is 1%, so over time, you will see the money that you saved increase. In five years’ time, you will find yourself the proud owner of a $105 savings account. But don't rush out to buy that TV; inflation will have made it cost 2 to 3% more per year than it did when you initially planned to save, making it $110 to $115.

Combatting Inflation

Time may equal money, but when inflation has its say, it just might not be enough. To battle the effect, it's often helpful to diversify your funds to both high- and low-interest investments. A savings account, CDs and bonds are still great places to keep some cash, even if it doesn't keep up with inflation, because they are safe and secure savings tactics. However, spreading your cash out to include some stock-based investments can help you realize some higher rates of return.

All in all, time is only as powerful as its rate of return. Keeping that kicker inflation in mind can help you plan your investments for your optimal return.

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