The Time Value of Money
Think about this — If you were offered $10.00 right now or $1.75 a year for
the next ten years, which would you take? Most people would opt for the $10
bill.
Another way to look at it — Imagine you won a million dollar lottery or other
kind of settlement that pays over 20 years. Now $1,000,000 + 20 = $50,000 per
year payment. That sounds great, but you also have to subtract federal taxes of
about 28%, leaving you with about $36,000 per year — and don't forget to take
out your state tax! How far will you get on less that $36,000 per year now? How
far will you get on that same $36,000 per year ten or fifteen years from now
when that payment is still coming in?
Using the Rule of 72, an investment of one
payment, $36,000, at 10% over 15 years will be worth $145,142. Sound like a good
investment? Read on....
Using the same Rule of 72, if you took a lump
sum payment of $250,000 (only 25% of your
winnings) and invested it at the same
rate of 10% over 15 years, it would be worth $1,007,935 — more than you won
originally, which should be enough to keep up with inflation. Which is the
better move?
Inflation
We've all felt the effect of inflation in our lives — as time goes by, the
cost of everything goes up! Gas, food, cars, plane tickets, movie tickets and
the price of a home are just a few examples. The payments you receive in the
future are just not going to be worth very much when you finally receive them!
By selling future payments for a lump sum
now, that money can purchase more than if you took the payments each
month for all those years. So you can see why it is always best to cash in your
future payments for a lump sum now and do
something SMART with the money!
Key Reasons To Sell Your Income Stream
Individuals and businesses sell income streams (future payment or series of
payments — also called cash flow instruments)
for three basic reasons:
-
Access
Interest
or Yield
— People sell their income
streams — even for less than
face value — because they know that with cash
in hand today they can start earning interest or yield. Interest or yield
is what gives us the ability to invest money this year and turn it into an
even larger amount of money next year.
Inflation
— Inflation eats
away at the future value or "buying power" of money. You can buy more
with a dollar today than you will be able to five, ten or twenty years
from now. People sell their income streams because they realize that,
over time, the payments they receive will drop in real value.
Small payments
over a long period of time have less buying power. A
LUMP SUM
of
cash today can provide you with financial stability and flexibility. A
lump sum equals
Purchasing
Power!
Why would someone want to sell their note? Some
reasons for wanting a lump sum payment might be:
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Current enjoyment
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To pay off debts
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To fund college costs
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Other investment
opportunities
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Major purchases
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To pay taxes
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Simply tired of
collecting payments
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What is the advantage of selling a note? Economic
factors like inflation and the rising cost of living make money in the future
worth less than money today. The value of your note(s) today will
depend on several factors:
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The collateral securing
the note (if any)
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Number of remaining
payments
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Interest rate (if any)
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Credit worthiness of the
party making payments to you.
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Once again, the Bottom Line is . . .
Cash
TODAY
is worth
more than cash TOMORROW!
