Boiling Frogs

This is the second in my Present Value series, and the first in which I’ll be looking at other’s claims which seem to make sense at first glance, but are terribly misleading under closer examination. I pick these examples not to prove others wrong, but because taking present value into consideration substantially changes the terms of the debate. My first post elucidates on the concept, and how to calculate it.

Vanguard seems to be one of the better thought-of investment management companies — they’re client-owned, low-cost, have high customer satisfaction, and seem to be the most honest of the options. I’d agree with all the previous points; it’s where I have most of my money.

So I was surprised when I came across their Power of Compounding flash video which completely ignores present value, and therefor presents a much more positive picture of compounding, benefiting, of course, Vanguard.

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So. I promised myself this would simply be a forum to educate people on what I think are obvious, but overlooked, paradigms of personal finance. And possibly other topics (though my econ background doesn’t help with cooking — and i expected economics at university would be like home economics in high school!). I promised myself it wouldn’t be the typical blog-slash-opportunity-to-bitch.

Well, I found something to bitch about. So that promise has gone out the window by post #2.

Today WaMu charged me $20 for “excess activity” in my savings account (two $10 charges). Upon calling, I was told that it’s an FDIC-mandated charge placed on savings accounts, essentially as a way of differentiating them from checking accounts, called Regulation D. And that it comes into effect after six transactions per billing cycle. And that there was nothing they could do about the charges. And a number of posts on the internets seem to confirm this.

However, a number of posters on the internets haven’t looked at the FDIC regulations.
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In my newly-minted capacity as a financially-responsible person, I’ve been reading a lot of personal finance blogs and other resources. And there’s one very big point that everybody seems to be missing — “present value” or “the time-value of money”. It was the first and most important lesson in my university’s Intro to Finance class, and something that needs to be in the back of everybody’s mind, especially when they’re talking about money over long periods. Otherwise, you’re not comparing apples to apples.

Essentially, a dollar today is worth more than a dollar next year. (Or, Helga, if you’re in 1920’s Germany, a mark today is worth more than a mark in 10 minutes.) The cause is inflation. If your dollar buys a loaf of bread today, and bread inflation is 5%, then that dollar will buy only 95% of a loaf next year, 90.2% the year after, and 85.7% in two years, and 59.8% in 10.
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