By Ben Leybovich updated (www.biggerpockets.com)
You hear bells, but you don’t know where they are…
There’s an old Russian proverb that my wise mother used to tell me quite often. What it aims to describe is a feeling of being so close to the truth (hearing the bells), and yet so far away…some finite, yet crucial pieces are missing and preventing you from putting the big picture together!
My good friend Mr. Brandon Turner never ceases to provide us with grandiose, even at times bombastic, thoughts. However, it seems that what is truth to Brandon is often somewhat less to me. Today, I am providing you with a counterpoint to one of his latest articles. Which one of us knows where the sound of those bells is coming from? You be the judge.
You probably will not believe wouldn’t believe this, but in private Brandon tells me that I am one of the smartest dudes he knows. God forbid he should agree with anything I say publicly, though. On the other hand, consider this — Brandon could make me disappear off of this blog with about the same amount of effort that it takes you to sneeze; and yet – I am still here, which likely means that I know something, and some powerful forces are aligned to bring my thoughts before your eyes.
Well, today I am here to tell you that yet again I disagree with my friend.
Here’s the Problem
Brandon’s post is a countdown of 10 items he sees as most important truths relative to things that financially sophisticated people understand about money. The article is very well written as usual, and I concur with Brandon on most of his points — but not everything…
Specifically, the first item on Brandon’s list is:
- I’d rather have $2 tomorrow than $1 today
And a few bullet points down:
- Forget nuclear…Compound interest is the most powerful force in the universe
Do You See a Contradiction Here?
Is it just me, or do these two bullet points negate each other — do you see a problem here?
Never mind; you don’t see the problem. Judging by the fact that Brandon’s article had about 200 Facebook likes in the first day, I know that you completely ate this stuff up… hah!
This one is a bit tricky, actually. Brandon is wrong, but he is not wrong; he was totally right about one side of the truth — but at the end of the day, Real Estate Investing is about seeing that which is not obvious, and while Brandon is right as it relates to the concept of frugality, which is hard to argue, he is wrong about the less obvious concepts.
Given the option, you should absolutely take $1 off the table today in lieu of waiting for $2 tomorrow. There are many less obvious reasons; let’s look at just a few.
Why You Should Take $1 Off the Table Today
The more money you leave on the table, the more money you risk losing — basic concept. I don’t care how you dress it up; investing carries risk, and as such, the ultimate technique for limiting exposure of financial loss is to limit presence of money in the deal.
Therefore, you must put a value on risk in order to properly access whether taking $1 today is better or worse that $2 tomorrow — most of the time it is!
Time Value of Money
Time value of money is another reason to take $1 today verses $2 tomorrow. Interestingly, I think Brandon knows all of this as well as anyone, but was so emotionally wrapped up in his article and making a point, that he allowed himself to lose track of logic…
Not to worry. He has a friend (Me) who possesses an increasingly keen sense of the obvious. Did I mention — Brandon listens to me, the implication of which is that you should listen to me as well?!
Here you go — in a fractional reserve banking system, money (I should say currency) is necessarily worth more today than it will be at any time in the future. Therefore, the sooner money is put to use via compounding, the better, which brings us to my last point…
Brandon made a valid point out of this on his list: compounding is a powerful force, indeed.
He never made the connection, however, that the effectiveness of compounding is a function of TIME, and starting sooner with less money is much more powerful than starting later with more. I don’t have time to do screenshots of Excel to showcase this, but please play with it on your own if you don’t believe me. Bottom line — starting with a dollar today will lead you much farther than starting with $2 tomorrow, providing similar rates of compounding returns.
Brandon knows his audience, and he writes that which he reasonably believes will make you nod your head — and you don’t disappoint. However, many issues that we deal with on a daily basis are like the Yin and Yang: there are two sides, and while only one side is typically illuminated in the daylight of conventional wisdom, there’s always the other side.
Believe me, having read this article, Brandon will change his mind on this; and you should as well. ????
P.S. One thing to remember — taking money off the table today can come at the price of higher tax exposure, and therefore you have to plan carefully what, when, and how you do it; otherwise, you risk diluting the positive effects of compounding.