Page 2 - FWP Wealth Adviser newsletter - Issue 117: August 2025

ISSUE 117
AUGUST 2025

At its core, the time value of money means a dollar today is worth more
than a dollar tomorrow. Money you have now can be invested or put to
work, earning interest or returns that compound over time.

Understanding the TVM is not an academic exercise Cognitive Biases: Why We Struggle to
reserved for finance professionals; it is a crucial skill for Value the Future
anyone seeking to build financial resilience in Australia. Despite TVM’s underlying logic, most people consistently
This article demystifies TVM, exposes the common traps prefer immediate rewards. Psychologists call this “present
that undermine good decisions, and offers practical ways to bias” or “hyperbolic discounting.” It means we value $100
ensure your future self will be in a much stronger position. now more than $120 later, even when waiting makes better
financial sense. This present bias is strong enough to over-
The Time Value of Money: What It Really Means ride our best intentions.
for Australians One reason people struggle is because our brains are not nat-
At its core, the time value of money means a dollar today urally skilled at grasping how compounding works. Exponential
is worth more than a dollar tomorrow. Money you have now growth feels unintuitive—debt seems to expand slowly and then
can be invested or put to work, earning interest or returns suddenly balloon; investment returns often seem invisible until,
that compound over time. Inflation, on the other hand, over years, they become surprisingly large.
gradually erodes the purchasing power of your money. Classic experiments like the Stanford marshmallow test
The magic of compound interest is a powerful force. For show that the ability to delay gratification predicts positive
instance, $10,000 invested today at 5% annual compound life outcomes, including financial security. Yet, many adults
interest will double to more than $20,000 in about 14 and children alike will give up future advantages for instant
years. This is known as the “rule of 72”: dividing 72 by your satisfaction, making it difficult to build up savings, resist
expected interest rate gives you the approximate number of high-cost ‘buy now, pay later’ schemes, or stick to a super-
years for your money to double. annuation strategy.
This principle plays out in key parts of Australian finan- These challenges are often amplified in Australia, where
cial life: early super withdrawals, the popularity of high-interest
• Superannuation: Small, consistent contributions early consumer debt, and limited awareness of employer-matched
on use the power of compounding to grow significantly. contributions show how present bias costs people real
Delaying contributions or ignoring employer co-contribu- money.
tions can make future goals more difficult to reach. The
structure of super is designed to maximise these com- Breaking the Cycle: Practical Strategies for Long-
pounding benefits in a tax-effective way. Term Financial Wellbeing
• Mortgages and Loans: Extra payments towards your Overcoming these biases doesn’t rest on willpower alone.
mortgage shrink interest bills dramatically, while revolv- Australians can harness practical tools and simple habits to
ing credit card debt or loan repayments work against you set their future selves up for success:
through the same compounding process, only in reverse. • Use simple rules and tools: The “rule of 72” and online
• Savings and Investments: Minor differences in annual calculators help work out how quickly money grows or
return or fees can, through compounding, add up to sub- shrinks, making TVM real and personal.
stantial sums over decades. Many Australians overlook • Automate good habits: Setting up direct debits into
how choosing lower-fee funds or seeking even slightly savings, extra super contributions through salary sacri-
higher returns can improve their outcomes. fice, or regular investments turns a good intention into a
reliable result. Automation helps you sidestep the temp-
Everyday Australians face countless TVM decisions: tations of present bias.
whether to spend a tax refund or invest it, to take a lump • Pursue financial education: Learning clear frameworks
sum or structured payments, or to assess the long-term ef- for TVM empowers better decision-making. Whether it is
fects of a mortgage offset account. In almost every scenario, accessing reputable online guides, speaking to a financial
a true understanding of how time amplifies gains and losses adviser, or using resources from universities or consumer
makes for better and more confident decision-making. groups, education pays.

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