How Much Discount Rate Should You Use?

The time value of money matters for financial decision-making. Money in the future is worth less to you today because the sooner you have money, the sooner you can use it to earn a positive rate of return by either investing or paying down debt. To find the present value of $1,100 annual payments out 10 years, we would manually do this for each feature cash flow and then add them up.

Transcript

chevron_right

Play full episode

chevron_right

Transcript

Episode notes

The concept of financial math is another foundational element of investing and good economic decision-making, and today we are carrying on the recent string of shows dealing with these kinds of fundamental aspects. First, we have a look at the central idea of the time value of money, and how this plays into many areas of our finances, such as retirement planning, spending, investing, and so on. From there, the conversation goes on to cover exponential functions, the tradeoffs between saving and spending, and regrets. Today's 60-second episode recap is of the great conversation we had with David Blitzer back on Episode 54, and we also do a quick book review of the potentially life-changing How to Live on 24 Hours a Day. We finish off this punchy episode with some news from the community and some thoughts on the ways in which competition and repetition can improve a skill.

Key Points From This Episode:

• Introducing the time value of money, as well as the concepts of compounding and discounting. (0:03:07)

• Applying financial math in different ways to varied questions. (0:11:34)

• Lessons from Cameron's first business selling worms. (0:18:15)

• The challenges and biases associated with exponential functions. (0:20:27)

• Spending and saving; illuminating the reality of the tradeoffs. (0:27:26)

• The biggest problems of foundational regrets. (0:35:40)

• Looking back on the episode with David Blitzer on indexing. (0:42:33)

• Reviewing the 1908 book, How to Live on 24 Hours a Day. (0:44:25)

• TV shows, podcast reviews, updates from the community and more. (0:49:05)

• Incentives and leaderboards; unpacking the impacts of practice and competition. (0:56:43)

Participate in our 23 in 23 Reading Challenge: