ShmoopTube

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Finance, a la Shmoop. [title page]

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What is the time value of money?

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Hmm...

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Well, think of money--the money you'd be investing--as sitting in a pile on a continually moving [money on escalator]

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escalator with checkpoints every day.

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Well, this is the investing escalator, and this particular escalator is the escalator

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of safe bonds. [safe bond bag and escalator]

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It moves at a slow, steady pace, but each week, the bag gets slightly bigger, and there

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are no holes in the padding--no cliffs it will send you over. [bag grows]

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All right, now this is the escalator of risky equities. [equity escalator shown]

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All right, hang on tight.

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Yeah. So equities are things like stocks, and we're focused here on risky ones, like just IPOd

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companies. They could be Yahoo in 1996, which whent up 50+ times over its IPO price, or it could [Yahoo growth chart]

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be Crap.com, which IPOs and then went bankrupt three years later. [toilet flushes]

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So, why does all this matter on the escalator?

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Well, because if you zoom out on equities, you'll see that over long periods of time--like

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decades--money grows, and well, it grows a lot. [growth chart]

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Over time, the stock market has almost always produced a very nicely positive investment [money baby grows]

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return.

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It might be a year from now that you see significant returns, or it might take ten years, but you'll [person gets money back]

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be headed in the right direction if you wait long enough for the golden love.

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All right, well to illustrate, check out the S&P 500 chart right here. [chart shown]

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Okay...

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Well, you can see there wasn't a whole lot of action from 1950 to the mid-1980s right

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there, then the 70s here is flat--nothing happened. [growth illustrated]

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Dividends grew a whole lot, though.

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And then when Reagan came to office, all kinds of good things started happening to the sock [Reagan appears]

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market.

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Look at 1980, and then blam, it cranks up through 1988.

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And then, we get the mid-90s.

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Greatest bull market in history, with the Dot com bubble exploding right there, and

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things went down a whole lot... [events illustrated]

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And then things came back, and then they went down a lot, and wow, look at it in 2017, it's cranking.

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So yeah, welcome to a quick tour of the stock market.

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That's kind of how things hang, but you can tell from 1950 to today, it's a nice, sloping,

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upward line there. [person demonstrates stock market]

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Yeah, that's the stock market.

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And go back to the 1970s thing right there, where everything was flat.

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Well, the stock prices back then didn't have to go up a ton for investors to be handsomely [investors paid in dividends]

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paid for their invested capital.

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They got dividends for them.

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The point of the escalator is to highlight time, here.

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That's the ding-ding-ding sound you keep hearing in the background as each day passes and another [money plant watered]

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iteration of safe bond compounding happens, or dividends get paid, or equities grow in

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value over time.

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All right, well why is time important? [clock ticks]

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Because like oh so many cliched Wall Street movies claim, time really is money.

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The more time that passes, the more your net worth swells, usually. [investment grows]

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It's how the already rich get richer.

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Well, the amount of risk and time you have to lock up that investment determines which

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kind of escalator you're going to put your investment on, but it can always grow, so [people choose escalator]

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there's always value in the time you lock up your money.

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Remember that fact the next time a buddy asks to borrow a grand and somehow doesn't expect [person loans money]

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to pay interest on that thousand bucks for a year.

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The stock market has averaged going up about nine or ten percent a year for a century and

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change, and the bond market about half that much, because it carries a lot less risk. [upward trends demonstrated]

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So duh, it carries less reward.

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All right, well the grand you loaned your pal for a year could have given you a free

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50 bucks in interest in the bond market, and maybe a lot more if you'd think about investing [friend pays interest]

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it in the equity market... 10, 15, 20% for a good year.

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So yeah, the trick is to take the money you make and then let time put that money to work [money works for time]

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for you.

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The best part about having your money work for you is that you don't have to give it

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paid sick leave. [money is pretty sad in this harsh work environment]

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