£500 today or £1,000 in two years?

tgroom57

I'd take the £500 now - for the same reason that I have started keeping my Tesco vouchers in my purse. Occasionally I see an offer that allows me to 'double my money', but is more than I'd budgeted on that week. That reserve is not for luxury items, but to give greater flexibility in acquiring savings. That's how I can turn £500 into the equivalent of £910.

£5000 now or £10000 in 2 years is more difficult. I am unemployed, so £5k now is attractive. But although I am confident of finding £250 worth of opportunity in the next 2 years, I would be hard pressed to find £200 every month over the same period. I would batten down the hatches (something I'm quite used to now) and wait out the two years for the £10000.

On second thoughts: with £5000 I could buy a car and keep it on the road (for a bit). Whether that would make it easier to get a job offer remains to be seen.

SnowMan

For me it would have always been a no-brainer to take the £1,000 in 2 years rather than the £500, regardless of whether finances were strong or weak.

But that is because I tend to think very logically and numerically and can work out solutions as have been described earlier for being better off with the £1,000 in almost all cases.

I remember reading a book by Edward de Bono where he talked about 'logic bubbles'. The idea is that we all have our own ways of thinking and making decisions. Sometimes something like taking the £500 which makes no sense to me from my own 'logic bubble' perspective is completely logical within another person's 'logic bubble'. The key is to try and understand the other person's 'logic bubble'.

While it is reasonable and sensible to point out the numerical reasoning as to why we think that taking the £1,000 is best we have to be open-minded to the fact if we have explained that and another person still wants to take the £500 that is a resonable decision for them. Possibly it is a combination of wanting the money now and not wanting to go to the trouble of borrowing money to create a workaround solution.

The lesson to be learned is less a financial one here but a life skills one about respecting other people's ways and thinking especially where there is no ill intended.

I always turn up for things on time and it used to annoy we when people I was meeting up with were continually late. However that person who was always late might also be very tolerant of other people who were also always late and so that being late was a ground rule for living which made sense within their 'logic bubble'.

It doesn't mean that you can't get slightly annoyed about these sort of things or for the supposed illogicality of taking the £500 but I find trying to understand the other person's 'logic bubble' is a really good way to approach life.

minerva_windsong

Absinthe_Fairy wrote: »

I'd take the £1000 (or £10000) in two years rather than have half the money now, but then I'm in a reasonably good financial position anyway, able to save a few hundred each month. I imagine £500 (or £5000) right now would be a lifeline to a lot of people struggling to get by (especially as in two years their position might have improved).

This is my attitude - I'm luckily in a very comfortable financial position where I've got a good nest of savings, but obviously there are some people who aren't in that position and they'd be better off taking the £500 now.

I think for me it helps to look at what that money could represent - so for example, my OH and I are planning to buy a house early next year, so in the ten grand example that would be a huge chunk of the mortgage, or a wedding which would mean we could channel my savings, say, into paying off more of the mortgage. Whereas at the moment to me the £500 would just sit in my savings account.

jamesd

ViolaLass wrote: »

Except that one of the rules of investing is to risk only money that you don't need.

Actually not, it's vital that you invest money that you need, looking at a long term view, because most people need to provide for retirement or the possibility of long term illness. If you don't invest that money you're making a choice to be poorer than you could be, with using only savings accounts for long term accumulation a particularly bad mistake, followed shortly by exclusively overpaying on a mortgage, without also investing. Each is good if looked at in short term isolation but makes you poorer long term. And each is still right for some people, who can't deal emotionally with the variation of investment values and who need a least bad alternative.

Over the short term you're right. It would usually be foolish to put money at risk if it's needed in a few weeks or months, perhaps also years, depending on how much safety margin there is in the meaning of need and the timing. Investing the first six or nine months of an emergency fund wouldn't make sense for most people and investing the week's grocery money would very rarely be sensible for someone on a limited budget.

Most people in work simply don't have a choice about investing now anyway. Their pension pots are in defined contribution schemes and they are responsible for managing that money. Either they learn to invest decently or they choose to be poorer in retirement than they could be. As time passes it'll become an ever larger gap in the core financial competency that Martin is addressing. But his focus is money saving, so I can't really be too critical - he can correctly argue that it's not his core job. I can still try a little evangelism, though, because I know he's interested in financial education and at least to some degree is a fellow traveller. But I also know he knows his current audience and need for focus.

ViolaLass wrote: »

If you're poor e.g. in debt, you need that money.

Sometimes a shorter term need like this can be something better to deal with than long term planning. If you're going to be evicted, that £1,000 doesn't do as much for you as the £500 that prevents it and saves a lot of other costs. If you have a payday loan, getting rid of that can save you a lot more.

In other cases it might not be best. The proposition was 40% return a year and that would make it better to put the money on most credit cards and pay the interest to get the extra £500 in two years. But those with finances right on the edge aren't in a position to do that. Above them in ability to act come those who are merely poor, not on the knife-edge between being homeless and not. But at that level of poor there's a very strong pressure emotionally not to risk the money. That's true also in general. People who do invest have a stronger negative reaction to losses than pleasure at gains. It's one reason why private investors tend to buy high and sell low, while avoiding buying low after having just experienced the losses of the drop to lower values that makes a good buying opportunity.

danothy

I think there's a value to lessening your liability for something (e.g. a credit card balance). If you were to pay off a balance of £500 with the £500 now you would be free of the debt, where as if you make minimum payments and pay it off in two years with the £1,000 and keep the excess you are likely to be better off but you still have to contend with the risk that your circumstances might change and you'll be unable to manage the debt until the £1,000 came through.

Personally for me a reduction in liability towards a debt earlier rather than later has value, whether or not it's worth a 100% return over two years I would have to answer on a case by case basis. But there's definitely more to it than just numbers.

Casanova

My first thought was take the money now and pay off my highest interest debts. But even that's only 20% (and will get paid off sooner than two years anyway, so the average interest rate over two years I would save would be less). So I would wait - a cash bonus in a couple of years would be very welcome and could be the start of my house deposit fund! And I think I'd choose the same whatever the amount.

michaels

So Surely taking 500 now rather than 100 in two years is completely equivalent to saying I will pay you 1000 in two years but if you pay me 500 quid you can have it today instead - I wonder how many people asked the same question but in a different way would still take it up?

Of course the good thing about this survey is it suggests there is huge scope for the financially savvy to make money out of the impatient.

ViolaLass

jamesd - I get your point entirely. By 'need', I was thinking of money one needs now, like your example of the week's shopping money. It wouldn't be good for me to invest the £500 because it's money that I need now (well, in six months' time) and investing it is a decision that would have the potential to make me poorer (if the market dropped in the six months).

That said, I do have money in S&S (for my pension but not in a pension plan) but I don't count it in my savings and will only touch it when we have worked our way through all the rest of my savings. In a way, I'm probably not so much poor as scared and £500 would make me feel slightly better (it would keep me going for a month).

jamesd

ViolaLass, yes, that makes sense. When buying a flat over the summer I took money out of investments well before closing because it wasn't appropriate to keep that deposit money invested.

tgroom57

jamesd wrote: »

... those who are merely poor, not on the knife-edge between being homeless and not. But at that level of poor there's a very strong pressure emotionally not to risk the money.

'emotional pressure' (whatever that might be) doesn't really come into it. The deciding factor is how easily you can raise the money, should the need arise. Specifically, whether you can get that sum on credit.

I also think the terms 'poor' and 'in debt' are becoming a bit mushy. The people I know who are most in debt are not 'poor'. I would define 'poor' in terms of income, not indebtedness.