We are often faced with this choice with how we spend our money: spend some now for immediate enjoyment, or spend more, later, to get something bigger and better.

In business, this is quantified by NPV – a calculation that says that a dollar today is worth more than a dollar next year because you can do something value-adding with a dollar if you can use it for longer.  It allows you to compare different rewards given at different times to see which is optimal.  For example, it lets you decide whether to accept a lump sum, or an annuity if you win the lottery.

We make these choices all the time – we don’t eat cup ramen for every meal.  However, without a sense of what each expense represents as a trade-off, we can’t make informed decisions.  A $5 / day Starbucks habit costs $1250 (work week), but one year’s expense will compound to more than $2000 in 5 years, $3300 in 10 and $8700 in 20 years (assuming a 7% rate of return and 3% inflation).

The key is to make sure expenditures are meaningful and rewarding in the present, else it is better to defer in order to have a greater range of choices in the future.