Every professional investor should primarily be guided by cost-effectiveness and calculations. Of course, not everyone studied the financial aspect of mathematics. That’s why a useful tool for any investor is a financial calculator and a few concepts that will help him or her understand the essence of investing money. The basic concepts of investing are: the value of current and future investments which allow you to assess whether an investment makes economic sense.
The Present Value (PV) is the value received or paid today, or the monetary value considered from the point of view of today.
The Future Value (FV) is the value received or paid in the future, or the monetary value considered from the point of view of a certain point in the future..
Most of us know that 100 Polish Zlotys (PLN) today has a different (higher) value than 100 PLN in a year. In other words, 100 PLN in a year is worth less than 100 PLN today. This is due to several factors:
1. Inflation which “eats into” the purchasing power of money
2. Investment risk
3. The current submission on the future pleasure of consuming
4. The opportunity to invest money
Therefore, 100 PLN per year, in principle, will have to take into account the above factors, which will, we expect provide “gratification” in the form of profit from deferred consumption.
Unfortunately, very often before making any investment decisions, we forget about the numbers and say nothing about using a financial calculator. We do not think about how important the way of investment financing is..
When deciding we are guided by intuition, fashion or ways of financing (but not always the best) which often lead to fatal consequences.
The concept of present and future value also involves others, which in this article I will skip i.e. the cost of capital, rate of return or compound interest.
The concept of present and future value also involves other aspect which I will omit in this article i.e. the cost of capital, rate of return or compound interest. To better illustrate the concept of the value of the current and future we make comparison of investment: 100,000PLN paid today (cash) or 250,000PLN (230 thousand) paid for 30 years (spread over monthly payments) assuming growth in the value of money over time at 3%, the price of investments 100,000 PLN.
As you can see in the example above, a much better option will be to pay 250,000PLN in the future than to pay 100,000PLN today.
| Investment cost |
100.000 PLN ( 100 % cash) |
250.000 PLN (10 % cash, the rest in monthly payments of 625 PLN for 30 years)
|
| Paid today |
100.000 PLN |
25.000 PLN initial payment |
| The value of investments after 30 years |
242.726,25 PLN |
242.726,25 PLN / 0 PLN |
| Cost of investment after 30 years |
242.726,25 PLN |
242.726,25 PLN |
| Free investment earnings „unpaid” amount (7% annual profit over 30 years) |
0 PLN |
513.827,22 PLN |
| Difference |
0 PLN
|
+ 263.827,22 PLN |
Not only will the invested amount return (the investment will be free for us) we will still obtain more than 263,000PLN surplus of investment “free” of unpaid money.
Most investors make a fundamental mistake here without understanding the concepts (and even confusing concept) of the present value and future investments.
Asking about the value of investments and hearing the response of 250,000PLN, you believe that this price exceeds 2.5 times the market value of investments (market value today is 100,000PLN).
The error lies in the fact that in the second case, the price is only 25,000PLN paid today (which is four times less than in the first case). The total price (250,000PLN) will be paid by us in 30 years’ time) – and this time we can turn a profit in cash and pay off the investment.
It seems, however, that the Poles have a selective approach to this issue.
If they take out a loan, they do not claim to overpay for an investment / property (although with interest to pay, 2.5 times what it is worth). Well, they just pay – but only for 30 years.
You also need creditworthiness for this, pay interest and you cannot negotiate terms and conditions.
In 2014 almost 180 thousand loans were secured by real estate in Poland, and for a total amount of 38 billion PLN. So many people / families received credit. How many people did not receive it even though they tried to?
If you take only 10% of this amount, it overlooks the fact that 18,000 people wanted to buy property but did not buy it (actually probably just as many applicants did not receive credit).
So each year there are 180,000 families who want to but cannot buy real estate.
This is therefore a market worth 38 bn PLN per year – which is a lot!
If developers or individuals (sellers) considerable this ‘bit of interest cake” it could prove that banks are not we needed (or partly unnecessary).
Because if Poles saw that they do not need to have credit worthiness or not have to pay interest, and at the same time the American model, in case of trouble in repayment, nobody will pursue them to the end of their life for potential debt – it certainly would consider the situation seriously.
Of course, this would require education for both buyers and sellers, develop patterns of action and “conviction” to the proven model of financing and the use of many different channels to reach the consciousness of the people.
Today many of these types of transactions takes place in Poland, (as evidenced in notaries). There could be more – but it depends only on us.
In 2014 almost 180 thousand loans were secured by real estate in Poland, and for a total amount of 38 billion PLN. So many people / families received credit. How many people did not receive it even though they tried to?
Przeczytaj ten artykuł w wersji polskiej: http://www.businessmantoday.org/wartosc-obecna-p…ym-wiedza-polacy/
