Conventional financial advice is built on a single insight: time multiplies money. The longer you’re invested, the more your money is worth in the future. Defer gratification now, maximize the number later.
Time has the opposite effect on your life. The more time that passes, the exponentially less time you have left.
Living a balanced life means ensuring you are properly weighing the time value of all your decisions.
The Time Value of Your Money
Time is the cheat code to wealth.
A dollar invested at 8% a year when you’re 20 could grow to $31.92 by the time you’re 65. Time does all the work for you.
But that same dollar invested when you’re 50 would only grow to $3.17 by the time you’re 65 at that same 8%.
Your invested dollar is worth exponentially more with each passing year. The goal is to start early and let your investments compound. This is known as the Time Value of Money and is one of the first things taught in Finance 101 courses.
The Time Value of Your Life
The Time Value of Your Life moves in the opposing direction as the Time Value of Your Money. It decays exponentially.
Let’s say you’ll live to 80.
When you are five year old, you still have 75 years left on the clock. The next year of your life represents only 1.3% of your remaining life (1 divided by 75 remaining years). Time stretches out infinitely with all of life’s wonderful experiences still ahead of you.
At 75, you have only five years left on the clock. The next year of your life represents 20% of your remaining life (1 divided by 5 remaining years).
And it’s not just time on the clock that’s exponentially running out. Life’s experiences have a rapidly decreasing shelf life.
At 20, you’ll have 60 years to look back on the memories from your summer road trip that you take with your best friends between sophomore and junior year. As Bill Perkins wrote about in Die With Zero, early experiences pay memory dividends throughout the rest of your life.
At 75? You have just five years to appreciate any new experiences or memories you make.
This exponentially decreasing life to time relationship is what I call The Time Value of Life. It is the inverse of the Time Value of Money
The Tradeoffs Between Time, Life, and Money
Most conventional financial plans and advice are built entirely around the Time Value of Money. Save more when you’re young. Delay gratification. Get a high score at the end.
What they don’t account for is that every year you spend waiting to live the life you want is a year with a quantifiable and diminishing value on the other side of the equation.
The goal of life is to ensure you make the proper tradeoffs between the Time Value of Your Life and the Time Value of Your Money.
Understanding this duality can help you think through many of life’s important decisions. Let’s look at your career through these two tradeoffs.
The Time Value of Your Career
Let’s say you just graduated and are 22. You plan to work until 60.
You start the “career game” with 38 total working years. Your first year represents 2.6% of your remaining career (1 divided by 38 remaining years). You have zero net worth but at least your parents paid for college so you have no debt.
Fast forward a bit through a few years of meetings, conferences, and late night deck updates. You’re now 40. You’re an SVP at a large company and have $2m saved across your retirement and brokerage accounts. And you’re able to put away an additional $150k a year.
But you’re quietly unhappy. You’ve been thinking more and more about whether you’re on the right path. You secretly wonder if the career track that you fell into at 22 still represents who you’ve become decades later.
You’ve got a dream in the back of your mind. You want to start something of your own. Do work that matters and spend more time with your kids who are growing up way too fast.
You really want to take that leap but you’re making good money now and want to save up just a bit more before you leave the corporate world. So you wait a year. Then another year. Suddenly five years have gone by and you just lost 25% of your remaining career to indecision and the fear you may not have enough for retirement.
Five years of Sunday evenings wondering what might have been. Five years of being the person who almost did it. And the clock is running out faster and faster.
What you didn’t account for was that your $2m invested at 8% a year when you were 40 could be worth $9.3m by the time you retired at 60. Even if you never contributed another dollar to retirement.
You traded 25% of your remaining career years for money you didn’t even need.
Balance The Equations
These are the kinds of tradeoffs people are making between the Time Value of Life and the Time Value of Money.
The conventional financial plan optimizes for the Time Value of Money. It does its job perfectly. What it doesn’t account for is what you’re giving up on the other side of the equation.
Your money has a time value. So does your life. The financial plan that ignores one of them isn’t complete.
Nathan
Founder & Lead Advisor
[email protected]
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Kangpan & Co. is a fee-only, registered investment advisor specializing in helping mid-career professional navigate the work, life, and financial tradeoffs that define their 30s and 40s.
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