Lets say you lent your friend Ruby $500. (Clearly, you're a generous friend!)
Would you rather she repay you today, in a month, or in a year?
The most obvious answer would be today, right? Apart from feeling a sense of relief at having received your back, ever wondered why this is also the most financially sound answer?
Have you ever thought of the amount of value you could create with the money you have today!?
Well, the concept of Time Value of Money (TVOM) describes just that.
What Is The Time Value Of Money?
It's the idea that the money in the present is more valuable than the same sum in the future because of its potential of being invested and earning interest.
So in simple words: the dollar you have today is worth more than your dollar tomorrow!
This video further simplifies the concept of TVOM.
Why Does The Time Value Of Money Matter?
This is a concept that is used in almost every transaction we undertake either as:
while running a business
banking decision making, etc.
Your job within this system is to limit the cost of money to you and to increase returns on your investments so as to increase your time value of money.
I invest $100 today. Which of these outcomes would demonstrate the TVOM?
How Can We Use This Principal To Manage Our Personal Finances?
The present value calculations can help answer financial queries for areas like:
Savings for college
Home, auto, or other major purchases
The future value calculations can help if we are looking to invest, we can analyse the return we would be expecting and the TVOM.
TVOM shows us that time really is money.
The value of the money you have now is not the same as it will be in the future and vice versa.
This knowledge can help you make strategic choices about:
Saving for retirement
Giving or taking out loans
Apply your TVOM knowledge by looking at your current investments. Are they working for you?