Why $100 in Your 20s is Worth $500 in Your 60s

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What if I told you that $100 at 25 is worth $500 at 65, even after we adjust for inflation?

Well…it is.

There’s an unspoken belief in personal finance that a dollar is always worth a dollar (putting inflation aside). We assume that spending $100 today would bring the same amount of joy as spending $100 (inflation-adjusted) in the future. But it won’t.

Why?

Because of how we experience time as we age. And it took a French philosopher from the 1800s to help me understand why.

Why Spending Becomes Less Valuable with Age

In 1877 the French philosopher Paul Janet put forth a new idea about why time seems to speed up as we age. He proposed that "the rate of passage of subjective time is proportional to the age of the person making the judgement."

In other words, younger people experience time more slowly because they have lived less total life than older people. When you’re 10 years old, one year is 10% of your life. By the time you’re 50, one year is only 2% of your life. This difference, Janet proposed, is why our perception of time seems to increase as we get older. Each additional year reduces the novelty of lived experience, making time seem like it is going faster.

George Mack shared this visual of "Janet’s Law" for someone born in 1990:

As you can see, the first five years of your life take up roughly as much perceived time as early adulthood (6-21) and the rest of your life (22-80).

Janet’s Law is directionally accurate, but needs to be adjusted for one thing—memory. Most of us have little to no memories of our early childhood, so our perception of these early years as adults is basically non-existent. Research on memory agrees with this. Older adults consistently seem to have a reminiscence bump (or enhanced memory) of ages 10-30.

If we adjust Janet’s Law to start at age 10 to take into account this reminiscence bump, then when you’re 20, one year represents 1/10th (or 10%) of your "memorable" life. This also means that, when you’re 60, one year represents 1/50th (or 2%) of your memorable life.

Adjusting for the reminiscence bump, your perception of time would look like this:

Now, most of your perceived life comes in childhood, followed by young adulthood, and so forth. It also means that your 20s occupy 5x more of your perceived life than your 60s.

You can see this in the chart below which shows the percentage of your overall memorable life that each year represents (through age 80):

As you can see, age 20 represents 2% of your memorable life while age 60 is 0.4%, or about 1/5 as much.

This simple observation has profound implications for how you spend your money throughout your lifetime.

After all, if a year in your 20s occupies 5x more of your perceived life than a year in your 60s, then any money you spend in your 20s should be worth 5x more to you in terms of experiential value.

Yes, perceived time is not the same as experiential value, but the two are closely linked. Years that occupy more of our perceived life are years that shape our identity more and that we remember more vividly. So, if experiences are valuable partly because we relive them through memory, then years with more perceived time should also pay the highest experiential dividend.

This matches my experience going to restaurants in my 20s and early 30s. In my 20s going out was fantastic. Everything was new and fresh. But by my mid-30s, fancy restaurants started to lose their appeal. As I wrote previously, "my 60th dry-aged ribeye didn’t taste as good as my first." The habituation to novel experiences makes spending money earlier in life more valuable than later in life.

But this creates a problem—if money buys us better experiences while younger, why should we save for old age?

Should We Spend More Money in Our 20s?

So far we’ve determined that spending money earlier in our lives gives us a bigger experience payoff than that same money spent later in life. Does this imply that we should spend all of our money earlier in time to maximize our experiences?

No.

The issue with this approach is that it doesn’t take into account the compounding we give up along the way for every dollar we spend now. So while $100 in our 20s may be worth 5x more (perception-wise) than $100 in our 60s, due to compounding that $100 in our 20s can become much more than $100 in our 60s.

How much more? Well, it depends on your rate of return. If we assume that you can get a 4% inflation-adjusted return for 40 years, then every dollar invested today will become about $5 in real terms in 40 years. Note that this basically matches the 5x perception premium of spending money in your 20s versus your 60s!

Therefore, with a 4% real rate of return, spending $100 at 25 is roughly equivalent (experience-wise) to investing that $100 for 40 years and spending $500 (inflation-adjusted) at 65.

Of course, this is with a 4% real annual return. If you believe that you could earn more than 4% real per...