Are You Nervous About Your Future as a Finance Professional? I’ve Been There!
Just to be clear, I haven’t been to your future! But I have worked in the field of finance.
For almost two decades, I commuted to work. My best friends know that I drive like a grandpa. If the speedometer ever hit 88 mph, I would have blamed it on too much coffee.
Photo by Brent Pritchard.
There’s something both extremely dangerous and memorable about 88 mph. Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):
Here's a question that the above-average drivers will nail. Can drivers pass when there’s a solid line down the middle of the road? No, they can’t. This should remind you that you can’t move money along the solid timeline. It’s a Time Value of Money no-no to add or subtract or compare money in different points in time (on the timeline): TVM Rule #1.
To illustrate this point of time travel as it relates to the Time Value of Money, we can look to the Hollywood blockbuster Back to the Future starring the fictional character Marty McFly. In the movie, Marty McFly is able to travel back in time using a car that had been converted to a time machine thanks to a core component: the flux capacitor.
When it comes to the Mathematics of Finance, we don’t have a time-traveling Delorean, but aspiring and current finance professionals do have a handful of building block Time Value of Money equations permitting time travel for money by way of (1 + i)^N. This is why I refer to (1 + i)^N as the Flux Capacitor of Finance. (In the building block Time Value of Money equations for a perpetuity it takes the form of “i” or (1 + i); however, as described later, you could plug “9999” for the variable “N” in the building block Time Value of Money equations for an annuity and get the same answer you would when using the building block Time Value of Money equations for a perpetuity. And since the building block Time Value of Money equations for an annuity rely on (1 + i)^N, this mathematical expression really is the Flux Capacitor of Finance.)
Now I hope you can see how Marty McFly traveling through time with money in his pants pocket would have been a kind of violation of TVM Rule #1. It would have been better for him to recognize that there are markets for capital and to have invested the money before his rendezvous at the clock tower!
If you’re an aspiring finance professional, you’re going to do great things in your future. I’m sure of it.
As of this moment, there’s no way to go back in time. You owe it to yourself to understand how to apply the most important concept in the field of finance—which will help you in the classroom, in practice, or while sitting for an industry designation examination.
As a college finance lecturer, I’ve seen the deer-in-the-headlights look from students who thought they had the Mathematics of Finance figured out. That is, until real-world situations were presented.
How do you feel about your handle on the Time Value of Money?
Brent Pritchard is an author and college finance lecturer with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.