Time Value of Money (Make It Work)
Why smart investors never pay cash (even when they can afford to)
The Million-Dollar Question:
You have $300,000. Option A: Buy a house with cash. Option B: Put 20% down, invest the other $240,000. In 10 years, Option B nets you $847,000 more. Here’s why every smart investor chooses Option B.
1. Why $1 Today > $1 Tomorrow
Time value of money is the foundation of all wealth building. Master this, and you’ll think like the rich:
The Core Principle:
Money available today is worth more than the same amount in the future because of its potential earning capacity.
Simple Example:
$100 invested at 7% annual return becomes:
- Year 1: $107
- Year 5: $140
- Year 10: $197
- Year 20: $387
- Year 30: $761
That $100 bill becomes $761 by waiting 30 years.
🎯 Why This Changes Everything:
Opportunity Cost
Every dollar tied up in real estate could be growing elsewhere
Leverage Power
Use other people’s money, invest your own for higher returns
Inflation Protection
Money loses value over time – make it work harder
2. Present Value vs Future Value
The math that separates rich investors from everyone else:
The Magic Formulas:
Future Value (FV):
FV = PV × (1 + r)^n
- PV = Present Value (what you have now)
- r = Interest rate per period
- n = Number of periods
Present Value (PV):
PV = FV ÷ (1 + r)^n
What future money is worth today
Real Estate Application:
🏠 Scenario A: Pay Cash
Property: $300,000 house
Cash invested: $300,000
Annual appreciation: 3%
10-year value: $403,176
Your gain: $103,176
💰 Scenario B: Finance + Invest
Property: $300,000 house (20% down)
Down payment: $60,000
Remaining cash: $240,000 → invested at 7%
Investment grows to: $472,367
Property equity: $103,176
Total wealth: $575,543
Extra profit: $172,367!
💡 The Insight:
By financing the property and investing the difference, you made an extra $172,367 over 10 years. This is why wealthy people borrow money even when they don’t need to.
3. Compound Interest: The 8th Wonder
Einstein allegedly called it “the most powerful force in the universe.” Here’s why:
Simple vs Compound Interest:
Simple Interest (Linear Growth):
$10,000 at 7% simple = $700 per year
After 30 years: $31,000 total
Compound Interest (Exponential Growth):
$10,000 at 7% compound = $700 first year
But then you earn interest on the interest…
After 30 years: $76,123 total
$45,123 MORE just from compounding!
The Power of Time:
Start at 25:
Invest $5,000/year for 10 years
Total invested: $50,000
Value at 65: $1,142,811
Start at 35:
Invest $5,000/year for 30 years
Total invested: $150,000
Value at 65: $566,416
Start early, invest less, end up with 2x more money!
Compound Interest in Real Estate:
Real estate compounds in multiple ways:
- Property Appreciation: 3-5% annually
- Rent Increases: 2-4% annually
- Mortgage Paydown: Tenants pay your loan
- Tax Benefits: Depreciation shields income
This is why real estate creates more millionaires than any other investment.
4. Time Value Calculator
See the power of time value with your own numbers:
Future Value Calculator
Opportunity Cost Calculator:
Compare real estate purchase vs investment alternative:
Real Estate Option:
Investment Alternative:
5. Inflation: The Silent Wealth Killer
Your money loses value every year. Here’s how to fight back:
The Hidden Tax:
At 3% annual inflation, your purchasing power gets cut in half every 23 years.
What $100 Buys Over Time:
Real Estate vs Inflation:
Real estate is one of the best inflation hedges because:
- Rents rise with inflation: Your income keeps pace
- Property values increase: Hard assets hold value
- Fixed-rate debt becomes cheaper: You pay back with inflated dollars
- Construction costs rise: Making existing properties more valuable
📊 Real Example – 1990 vs 2025:
Average Home Price:
1990: $123,000
2025: $420,000
241% increase
Average Rent:
1990: $447/month
2025: $1,967/month
340% increase
$100k in Savings Account:
1990: Bought average home
2025: Buys 1/4 of average home
Lost 75% purchasing power
This is why saving cash long-term actually loses money.
6. Case Study: The Two College Friends
Meet Sarah and Mike – same job, same salary, different money philosophy:
😰 Sarah “Save Cash” Strategy
- Saves $2,000/month in savings account (1% interest)
- After 5 years: $102,000 saved
- Buys $300k house with cash + $198k mortgage
- Continues saving $2,000/month
10 Years Later:
House value: $403,000 (3% appreciation)
Additional savings: $123,000
Total net worth: $526,000
🚀 Mike “Time Value” Strategy
- Invests $2,000/month in index funds (7% return)
- After 5 years: $143,000 invested
- Uses $60k down payment, invests remaining $83k
- Continues investing $1,200/month (after mortgage payment)
10 Years Later:
House equity: $203,000 (minus mortgage balance)
Investment portfolio: $394,000
Total net worth: $597,000
Extra wealth: $71,000!
🎯 The Lesson:
Mike understood time value of money and made an extra $71,000 with the same income. The difference? He put his money to work instead of letting it sit.
💰 Your Time Value Exercise
Calculate Your Opportunity Cost (15 minutes):
Use the calculators above to analyze a real scenario:
- Pick a property: Find a real listing in your area
- Calculate Option A: What if you paid cash?
- Calculate Option B: What if you financed and invested the difference?
- Compare outcomes: Which strategy wins over 10 years?
Document Your Analysis:
For your analysis, include:
- Property Details: Address/Location, Purchase Price, Down Payment Required
- Option A – Pay Cash: Total cash invested, 10-year property value, Total return
- Option B – Finance + Invest: Down payment, Cash to invest, Investment growth (7%), Property equity, Total return
- Winner: Which option wins and by how much
- Key Insight: What did you learn about time value of money?
🎯 Key Takeaways
Money today is worth more than money tomorrow – invest it wisely
Compound interest is exponential growth – start early and be patient
Inflation erodes cash value – real estate is an excellent hedge
Smart investors finance even when they can pay cash
✅ Time Value of Money Quiz
Question 1:
You have $100,000. Option A: Buy rental property with cash. Option B: 20% down, invest $80k at 7%. Which typically wins long-term?
Question 2:
$1,000 invested at 7% compound interest for 30 years becomes approximately:
Question 3:
Why is real estate considered a good inflation hedge?
Question 4:
The opportunity cost of paying cash for real estate is:
Question 5:
At 3% annual inflation, $100 of purchasing power becomes approximately how much in 20 years?
🎯 Ready to Complete Lesson 5?
Take the quiz to finish this lesson and earn progress toward your Real Estate Certification.
Students achieving 90%+ across all lessons qualify for potential benefits with lending partners and employers.
