A dollar is not necessarily a dollar. Especially when we’re talking about that dollar over the course of time.
In general, money now is better than money later
If money later, has to be more money than money now
This is due to the fact that
- Money can earn interest and
- The purchasing power of money decreases with time, otherwise known as inflation
So, any amount of money is worth more the sooner it is received. And the longer you go without it, the more you should get back.
If you put your money in the bank for a year, you’ll get a little bit more back than you put in. This is the interest received.
Your sister wants to borrow $100. She says she’s going to give it back to in exactly 1 year. She promises to give you $125 when she does. The extra 25 bucks is the interest. 25%. (25/100 = 25%)
When I was a kid, a plain slice cost 50 cents. Today it costs a dollar fifty. That’s inflation. Fifty cents doesn’t go as far as it used to!
This is a very simple concept, but foundational.
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