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Time Value of Money: What People Need to Understand about Time, Money, and Divorce

Which is better: $100 today or $100 tomorrow? The fact that that is an easy question demonstrates an intuitive, but important, concept about money: it decreases in value over time. However, that simple principle can lead to much more complicated questions, especially when it comes to divorce. For instance, what if the question had been, “Which is better: $100 today or $200 in a year?” or “a $300,000 marital home now or a retirement account that will be worth $400,000?” These more complicated questions require more than just an intuitive understanding that money now is better than money later. They require the understanding of something known as the time value of money.

The Time Value of Money

The time value of money is a concept used by economists to calculate how much a certain amount of money at one time would be worth at another time. Of course, just going through a divorce does not require a nuts and bolts knowledge of how to figure out the time value of money, but understanding the basic principles can help people make smart decisions when it comes to dividing up the marital property.

The basic idea behind the time value of money is that there are a variety of things that make money now worth more than that same amount of money in the future, including lost profits, risk, and inflation. As far as lost profits goes, money that people have can be invested for a profit. Even money that just sits in a savings account earns interest. The problem of risk relates to the risk that the payment will not actually come through. As promises of payment get made further and further into the future, more and more potential obstacles to payment appear, such as the spouse who is obliged to pay suddenly losing their job or falling ill. The final problem is one of inflation, which creates issues because money loses purchasing power over time during the ordinary growth of the economy.

Why This Matters in Divorce

This general decrease in the value of money over time is important in divorce because much of the property division process involves negotiation and tradeoffs between current obligations and those in the future. Take the example from the beginning about a $300,000 marital home and a $400,000 retirement account. Comparing those items is difficult for a variety of reasons, such as the unique benefits provided by a home and the upkeep costs associated with home ownership. Of course, one of the major difficulties is comparing the value of the home, which is immediately available, with the retirement account, which may not be accessible for decades. While the comparison could be done by hand, there are a variety of calculators online that can make the process easier.

Divorce is a complex process, and the legal issues represent only some of the considerations that go into it. If you are considering a divorce and want to learn more, contact a skilled Naperville divorce attorney today.