£500 today or £1,000 in two years?

£500 today or £1,000 in two years?

£500 today or £1,000 in two years?

Would you take £500 today or £1,000 in two years? I asked this on my Facebook Page today and the overwhelming majority of the 200+ who responded plumped for the instant £500. Yet how does that stand up to financial scrutiny? Few things could turn £500 into £1,000.

OK, here’s the question as it was posed:

"If you won a prize and were given the choice between getting £500 today or £1,000, but it’ll be paid in two years (from a very safe company so no chance of it going bust), which would you choose? And why?"

Around 4 in 5 people choose the £500 option (see people’s responses) and most responded very quickly, so I assume answered instinctively. And why not? It’s only a fun question on Facebook.

Yet while it’s hypothetical, it raises a huge number of interesting points about how we think about cash and it’s actually a good indicator of financial attitudes. Let’s start by looking at it in purely financial terms:

  • The impact of inflation. The Retail Prices Index is currently at 4.8%, so if rates remain that way, what costs £1,000 now will cost roughly £1,100 in two years. On that basis by waiting for the £1,000 you’re only getting the equivalent of around £910 at today’s prices.
  • Take £500 now and save it. Even at a massive 4% for a non-taxpayer (see top savings), at best the account would give you £540 in two years. So, on that basis, delayed gratification easily wins. Someone suggested putting it in premium bonds as there’s the chance of winning a lot. While that’s true, the chance is miniscule. According to www.premiumbondcalculator.com the probability of winning £500 or more is 0.124%, which is just over 1 in 800, so for most that’s a loser too.

  • Take £500 and invest it. Of course, you could take a risk with the money in the that it grows more quickly, yet to get the roughly 40% annual growth (compounded) you’d need to have £1,000 in two years is a massive ask that’d involve high risk investing and you’re just as likely to end up with £250 as you are £1,000.

  • Take £500 and pay off debts. If you’ve high interest debts paying them off will certainly outperform saving (see repay debts with savings). Yet even with a 30% credit card, it would only cost you £300 over two years to keep the debt, not as much as the £500 gain by taking the grand.

  • Take £500 and use it to stop bank charges / bill defaults. This is the main area where the financial mathematics shows you could beat the £1,000 by taking the £500 now. With some bank charges at £30 a pop, if this money gets you within your overdraft limit, the amount it saves you in fees could easily be more than £500 over two years. The same is true with mortgage defaults, or defaulting on other bills, which have substantial repercussions.

  • Take £1,000 in two years, and borrow it now. One person suggested getting a 0% for spending card, using that to build up £1,000 of debt, which you can then repay when the prize comes. For the disciplined, financially savvy this has some workable benefits in terms of getting instant gratification as a form of stoozing. In fact, what you’d need to do is get the card, spend on it, make the minimum repayments and then balance transfer after a year to another 0% card, though you’d pay a fee at that point.
Which option would you pick?

Which option would you pick?

On this basis, for all but those in serious financial trouble, it’d be worth waiting to take the £1,000.    

 Yet there are some more human factors to take into account:

  • You could be hit by a bus. If that happens, you don’t gain from waiting. In financial terms you would require a risk premium for waiting, ie, extra cash. Yet for all but the very old or those with very poor health, I would think the risk of going in the next two years is far outweighed by the £500 extra cash (in other words it more than covers the risk premium).

  • Instant gratification. For many people having the joy now of extra cash either to spend on or to reduce financial stress is simply too attractive to wait.

  • Personal circumstances. Your own finances may have improved by then so the increased utility from gaining £500 now may be more than getting £1,000 in two years when it has less impact on disposable income or lifestyle (vice-versa is also possible of course). 

Overall, even looking at it in such a cursory way (I’m sure others will have many more points), there are a wealth of situations to take into account. 

For me, though, I’d wait. You? And what if I’d asked about £5,000 and £10,000 rather than £500 and £1,000, would that change things?

Comment and Discuss