Several of my friends have mentioned that most people in America don’t have savings. And Bitcoin is too volatile to risk even a small amount over. This is a fair point. They would be correct. So today I’d like to introduce a new concept to help those struggling to save: Time Preference.
I’ll define Time Preference in a moment but before let’s paint a hypothetical scenario. I make $1000 a month. I spend $500 on rent, $300 on food, and $100 on utilities. This leaves me $100 to save. So let’s play this out to the end of the year and assume in 2019 we saved $1200 in cash.
Time Preference is defined as “High” or “Low”. High Time Preference means the individual places much higher value on the present compared to the future. Low Time Preference is the opposite, value is weighted greater in favor of the future. In practical application, it means the high time preference individual believes in spending right now. On the street, we call this instant gratification. Meanwhile, low time preference individuals believe in saving or investing for their future. Low Time Preference is highly correlated to Delayed Gratification.
The Crux of the Challenge
This is all theoretical so let’s ground it in a real-world experiment. Below is a famous study called the Marshmellow Test which perfectly exhibits instant vs. delayed gratification. Here is the legendary Michio Kaku breaking it down further.
Do note that Time Preference is not something you can opt into or out of. Everyone exists somewhere on the Time Preference spectrum. Choosing your spot on this high to low range will completely determine your financial path in life.
So you may be saying “I’ve never been taught how to save.”
First, let me be fair to you: saving is a genetically unnatural act. Consuming is a 100% natural act. And that is why 99% fail to save money. Now the good news: saving money is a mentality just like consuming. The challenge is you cannot have it at both extremes. America has taught us all to be consumers first. To take out lines of credit. So not only are we hardwired to spend right now. We are encouraged to spend before we’ve earned what we deserve “right now”. Put another way, we not only spend our present money but also spend our future earnings. And it gets even worse. The money you put on credit carries interest. Albert Einstein said the following regarding compound interest…
So the question is which side of compound interest are you on? The side who earns it or the side who pays it? Those who earn it 9 times out of 10 will become wealthier over time. Those who pay it will be forever stuck in a vortex of pain.
So what does all of this Low Time Preference have to do with Bitcoin?
Imagine you successfully adopt a low time preference mentality, save more money, and get on the right side of compound interest. Good on you, a hell of a start! Now you will encounter an invisible killer staring you in the face every day: inflation. Let’s go back to the year 2000 and apply the same scenario we started with assuming you saved $1000 that year. Here’s a link to an Inflation Calculator and below is the impact of inflation on that money today in 2020.
That means your money has lost 50% of it’s purchasing power just because you let it sit. An item that costs $1000 in the year 2000 costs $1500 today. That’s a bum deal. Why does this happen? This happens because the US dollar (and every currency around the world) continuously print more money to keep their economies running. Every dollar your government prints makes devalues or every dollar you own.
It sounds bad but it’s actually horrific. Below gives you wider perspective over a much longer time horizon. Since 1913, the US dollar has lost 96% of its value. In inflation lingo, the dollar was been inflated by +2500%.
This is depressing. Why should I save at all?
Currencies are not good savings vehicles because they will purchasing power over time. In order to successfully end up with more purchasing power in the future you need to outpace inflation. That is done through an investment. I will cover more investment choices in a future post but today’s post makes the case for Bitcoin.
Let me be clear. You can get badly burned by any investment vehicle. There are no guaranteed paydays. So you damn sure better understand what you’re buying or passing on to increase the likelihood of both positive outcomes as well as evading bad investments. So here is some starter knowledge on what exactly Bitcoin is and what makes it so relevant today.
Here’s my take on Bitcoin:
- It is a scarce asset with a maximum cap of 21 million to ever be made available.
- It has the best properties of gold but is also digital making it highly transferrable.
- All you need to play ball in this game is an internet connection. It is going to be the people’s bank.
If you haven’t saved and feel like you are playing from behind, Bitcoin also has one key advantage if you are patient. It has outsized returns because it is currently considered a speculative asset. If you are about to retire and have saved enough, this may not be the place and time for you. But if you are young and willing to take on some risk because you understand what Bitcoin is and see potential in its future as a technology and investment opportunity then that makes it a more honest bet. This can be a calculated risk for you to take some of your hard saved money and allocating it in Bitcoin if you believe it will leap forward allowing you to play catch up while most people try to play in stocks, which I believe to be a completely rigged game.
If you’re nodding your head thinking this may be a change agent you life needs. I will follow up with a post detailing specific steps to move you from a high time preference consumer to a low time preference saver.
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