If you are reading this, thank you and have a great day.
It was a great discovery for me that the value of money varies over time. And I am not talking about its value for a specific individual, but about value in general. For example: company’s future cash flow is discounted (is worth less than its monetary value) because of the risk of it being disrupted in the future. But today I would like to highlight the effects that investment has on the value of money and on money-related decisions.
Compounding Interest and Comparing Opportunities
Let imagine that you are looking for a job and have two offers on hand. One offer has a salary of £X a year and you know (for the sake of the example) that in 3 years you will be promoted and will have a salary of £2X per year. The other offer has a salary of £0.5X a year and you will have a salary of £2X in 2 years. Assuming that £0.5X is more than enough for living, there is no risk associated with promotions and everything else about the offers equal, the first offer is better. Why? It’s better because over the course of the first two years it will yield you £X more money which you would be able to you as you will. From a money management standpoint it means that during that time you would be able to invest your money and get a premium. Moreover, said premium can be reinvested in the following years and due to compound interest at work, the gap between the value of the two offers will become ever-widening.
Lost Value Due to Imperfect Information
It is very easy to notice lost value with total information of the job market but one can get into a very bad state without the market knowledge. Mostly focusing at the developer market in London (March 2019), it is possible that developers with similar amount of experience doing similar work may have salaries different by 20%-30%. Such differences are unlikely to go away on its own and when sustained over multiple years may lead to huge gaps in accumulated value which will only be exacerbated by the effects of compound interest. One of the ways to efficiently deal with this situation for individual developers is to obtain more market knowledge and use it to drive their employment decisions.
Conclusion
It is very hard to make money-related decisions in today’s shifting world. One should try and collect as much information as possible to achieve best results and not forget to take their long-term value into consideration.