Why do some people prefer money now rather than later?

One of the most powerful ideas connecting economics and finance is time preference, the tendency for people to value present benefits more than future benefits; in other words, to prefer value now rather than later. Essentially, highlighting that the longer you wait to use your money, the less valuable it will be in comparison to its present value. This concept is closely related to the time value of money (TVM) from finance, which states that a sum of money today is generally worth more than the same sum in the future because it can be invested to earn returns, is affected by inflation, and is subject to less uncertainty. Because of these preferences and the time value of money, some individuals have trouble with continuous saving, may postpone long-term goals, and find investments that pay off later less attractive. Economists illustrate these behaviours using  present value/discounting graphs that show how the value of future payoffs falls the longer one waits. Together, these frameworks help explain how both psychological preferences and financial principles influence decisions about saving, investment, and planning over time.

An example could be that we have two projects we have to decide between. Both of them will return €10 million, but project 1 in two years and project 2 in six years.

For this calculation, we use a simple mathematical equation:

*n = years

*i = discount rate

*CF = future cash flows

*PV = present value

From this, we can calculate the present value of both projects and decide which project is better. Of course, there are other factors that have to be considered while deciding, but for this we imagine that the only important factor is the discount rate and time. For simplicity, the example assumes a discount rate of 10%, although in practice the appropriate rate depends on factors such as the project's risk, the cost of capital, and prevailing market interest rates.

Project 1: PV = 10 million / (1+0,10)^2 = 8.26 mil

Project 2: PV = 10 million / (1+0,10)^6 = 5.64 mil

Here it is obvious that Project 1, according to this calculation, is preferable in this case if it is solely based on the return from the investment, time, and discount rate, because it has a higher present value.

Even when the time value of money is not applied directly in daily tasks, understanding it supports better strategic decisions. By comparing the present value of expected future returns, organizations can identify which projects are most beneficial. Investors also use this approach to evaluate companies based on anticipated performance, helping them decide where to allocate capital. For entrepreneurs, faster returns increase the present value of cash flows and improve the chances of attracting investment.

Risk vs return vs liquidity

Risk describes the possibility that an investment’s actual outcome may differ from what was expected, including the chance of losing money. In general, higher potential returns come with greater risk, while safer investments tend to offer more modest earnings.

Most people are naturally risk-averse, meaning they prefer a guaranteed outcome over a risky one, even when the risky choice could have a higher return. For example, many would choose a guaranteed €100 over a 50 % chance of €220, even though the latter has a higher expected value. This preference for certainty influences investment decisions and behaviour in financial markets. Risk attitudes shape how people allocate their money: more cautious investors tend to favour low-risk assets like government bonds, while others may choose stocks or other higher-risk investments.

Another important idea is liquidity, which refers to how quickly an asset can be converted into cash without significantly affecting its market price.  Investments that are difficult to sell quickly may be less attractive to some investors, and this liquidity concern also factors into returns. Together, risk, return, and liquidity help explain how people balance potential earnings against uncertainty and accessibility when making investment choices.

Magic Triangle of Investing

These three factors are often represented by the MAGIC TRIANGLE OF INVESTING (created by Harry Markowitz), a framework illustrating the trade-offs between risk, return, and liquidity. One of the fundamental principles of finance is that no investment can simultaneously offer high returns, low risk, and high liquidity. Investors may prioritize one or two of these characteristics, but usually at the expense of the third. For example, highly liquid and low-risk investments generally provide lower returns, while investments offering higher potential returns often involve greater risk or lower liquidity. Therefore, investors must balance these three factors according to their financial goals, investment horizon, and willingness to take risks.

*Disclaimer: The information presented in this article is intended solely for educational and informational purposes. It is based on concepts and knowledge acquired through academic study in economics and finance. The content does not constitute financial, investment, legal, or tax advice and should not be relied upon when making financial decisions. The authors are not licensed financial advisers, and readers should consult a qualified professional before making any investment or financial decisions.