Quick question: If I offered you one of three choices: $5,000 cash right now, $5,000 in a few years, or $1,000 a year for five years, which would you take?
Most of you would say $5,000 right now, which is the correct answer. There are a lot of reasons why most people feel this is the correct answer. One reason being $5k now gives you more options today; another reason is we have no idea where we’ll be in five years, so take the $5k now.
But to me, the best reason is TVM, otherwise known as the Time Value of Money. In plain terms, the theory is money today is always worth more than the same amount of money tomorrow.
The primary reason for this isn’t based on complicated economics or the value of the dollar or whatnot – it’s simply due to compounding periods. Giving me $5,000 now theoretically allows that $5,000 to grow upon itself. So if I had a time machine, I could jump forward a few years and see that my “past” $5,000 is worth more than “right now” $5,000.
**Full disclosure – If I had a time machine, I would not be using it to check my bank balance. I’m not that boring.
So let’s talk about money now as opposed to money later for businesses. The best example I could give you is taking a full Section 179 deduction, as opposed to yearly depreciation.** Taking a deduction on the full purchase price of equipment right now allows you to put that sum to work for you. The money you save/keep is going to be worth more than a like amount years from now. And it’ll be worth more than a little at a time for years.
This goes double when you finance a Section 179 purchase. You get the deduction, and you also keep the money the equipment would have cost you in the bank, and instead make payments. TVM works for you here too.
Give me the money now as opposed to later. Section 179 does exactly that. And TVM makes it even better.** Note: of course, always discuss with your accountant or tax professional.