BEFORE YOU CONCLUDE ON THE VALUE OF MONEY, READ “TIME VALUE OF MONEY”!
We have heard “Time is Money”, but so is the other way. Money is Time too!
What’s the most important thing about money in the context of saving money, spending money, or investing money?
We need to know two things:
- Amount of money in the discussion.
- The timing.
What would you prefer? Thousand Rupees today or Thousand Rupees after a year? Or a month?
If you figured out you want it today and not the next year, you are already aware of the concept of the time value of money. One year from now, the prices of goods or services you want to spend the money on could have gone up – Inflation. Plus, why would you have the impulse control to wait for one whole year for those extra rupees?
And that’s not it. Here is a little secret:
Your money will go to work for you! And the longer you have it, the more it will work!
When your money is earning interest, that interest compounds over time. You start slow, but then your money starts growing faster and faster. Over time, the total interest you earn even surpasses the original amount you had saved. Cool!
Of course, it can work the other way, too. If inflation is eating away at your money faster than interest is adding to it, you can end up seeing your savings go down the drain. Slowly at first, then faster and faster. (You’ll still have more Rupees in your account than you started with…but they will be worth less and less each year.)
ENOUGH OF STORIES AND SECRETS, LET’S UNDERSTAND THE CONCEPT:
The time value of money (TVM) is one of the core financial principles, that states a sum of money is worth more now than in the future.
Three reasons why this should stand true:
- Opportunity cost: Money you have today can be invested and accrue interest, increasing its value.
- Inflation: Your money may buy less in the future than it does today.
- Uncertainty: Something could happen to the money before you’re scheduled to receive it. Until you have it, it’s not a given.
Essentially, a sum of money’s value depends on how long you must wait to use it; the sooner you can use it, the more valuable it is.
WHY YOU SHOULD BE READING AHEAD ABOUT THE TIME VALUE OF MONEY:
- Applying the concept of the time value of money to projections of free cash flows provides us with a way of determining the value of a specific project or business.
- Additionally, investors use the method to assess businesses’ present values based on projected future returns, which helps them decide which investment opportunities to prioritize and pursue. If you’re an entrepreneur seeking venture capital funding, keep this in mind. The quicker you provide returns to investors, the higher cash’s present value, and the higher the likelihood they’ll choose to invest in your company over others.
TIME VALUE AND PURCHASING POWER – LET’S GET THIS STRAIGHT
The time value of money is also related to the concepts of inflation and purchasing power. Both factors need to be taken into consideration along with whatever rate of return may be realized by investing the money.
Remember: If you keep your money under your mattress for 15 years, not only will it be worth less because of inflation, but you’ll also miss out on the interest it can earn when invested.
YOUR LITTLE DECISIONS AND TIME VALUE OF MONEY
TMV is a fundamental concept that provides the foundation for virtually every financial and investing decision.
YOUR DAILY DECISIONS:
From taking out a loan to negotiating a salary, or making a purchase decision, to evaluate the best financial course of action.
Remember: “An understanding of the time value of money could help when deciding between a job that offers a decent salary and sign-on bonus, and one that pays more every year but offers no sign-on incentives,” says Brenton Harrison, a certified financial planner based in Tennessee.
THE BOTTOM LINE
The time value of money is an important concept to understand for personal finance.
Apply the TVM formula (Our team is all ready to assist you with numbers, lay that off from your shoulders) to any loans you have to determine if it’s better to pay them off or invest. You can also use it to see how increasing your retirement contributions can affect the future value of your dollars. It’s a great tool that gives you information that can help you make smarter financial decisions.
Remember: The formula for figuring out the future value of money shows us that money only grows through investment. Delaying an investment is a lost opportunity to grow your wealth.
Rightly put – “Money is a tool, used properly it makes something beautiful; used wrong, it makes a complete mess!”
