Best Use of Your Dollars - Understanding Money as a Tool for Success

Basic financial concepts like inflation, time value of money or the present discounted value and net present value are ways the financially aware use to understand, explore and inform their decisions about how their money is best used. These alternative uses of money valuation concepts and tools help measure and demonstrate the importance of your recognition and understanding of money management and finance skills, techniques and behavior.

In modern economics, inflation refers to a rise in the general level of prices. The time value of money is based on the premise that due to inflation one will prefer to receive a certain amount of money today rather than the same amount in the future, all else equal. Net Present Value is a way of comparing the value of money now/today with the value of money in the future.

A dollar today is worth more than a dollar in the future, because inflation erodes the buying power of future money, while money available today is worth more because its purchasing power is greater and it can also be used to invest and grow thus creating wealth. For example, $100 today assuming a 3.0% annual inflation rate would be worth $97 a year from now, then the present value of $100 to be received one year from now is $97 ($100 less 3.0% or $3 = $97). Stated differently, using the same premise, $100 paid a year from now is only worth $97 today. Investing the $100 at 10.0% would yield $110 a year from now, making your money $7 ($110 - $3 = $107) more valuable a year from now than today and nearly 20.0% more valuable in two years.

Post-July 1st 2006 student loan and consolidation find the cost of borrowed student loan money (interest rate) is relatively cheap in comparison to other borrowing cost such as the Prime Rate which as of September 2006 is 8.25%. Low student loan interest rates (6.80% fixed for Federal Stafford loans disbursed after July 1, 2006, 6.54% variable in-school, grace & deferment rate for most Federal Stafford loans disbursed before July 1, 2006 and 7.14% for these loans during repayment) coupled with alternative use of funds opportunities at repayment (interest rate offered on saving and investment products) allows the borrower to put her or his money to more productive use earlier in one’s career thus allowing you to seek safer, less risky investments that work longer and harder through the accrual and compounding of interest.

The concept of alternative use of money works similarly to your financial advantage and benefit when discretionary funds are used to pay off more expensive debt such as credit cards. When using discretionary money, especially from employment and student loans, you should consider the value you are receiving in return for the use of your dollars. Smart money savvy people seek the greatest value for their dollars. A choice between paying extra on a 3.50% student loan and a 16.99% credit card should be a no brainer. There is more bang (financial benefit), actually 13.49 percentage points more bang, for your buck when paying on a 16.99% debt versus a 3.50% debt.