What is the concept of time value of money?
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Answer # 1 #
The time value of money (TVM) is a fundamental financial concept that basically means money available today is worth more than the same amount in the future. Here's why this matters:
- Inflation: Money loses purchasing power over time due to rising prices
- Opportunity cost: Money you have now can be invested to earn returns
- Risk: Future payments are uncertain - you might not receive them
Simple example: If someone offers you $100 today or $100 next year, you should take the $100 today because you could invest it and have more than $100 in a year. Even just putting it in a savings account would earn interest.
This concept is why banks pay interest on deposits and charge interest on loans. It's the foundation for calculating investment returns, loan payments, retirement planning, and virtually all financial decisions. Understanding TVM helps you make smarter choices about saving, investing, and borrowing!