Time Value of Money
You probably know that as more and more years pass by, more products become more expensive. Sometimes, an elder relative might mention today’s ridiculous prices compared with the prices around when they were younger. This follows a conjecture called the time value of money (TVM).
The time value of money says money will be worth less tomorrow than today. In other words, the same amount of money today will be worth less than the same amount of money in the future because of inflation.
This concept is important because it can help you decide whether to use or save your money today or in the future. TVM can not only benefit individuals, but it can also be applied to others like companies and businesses.
So you might wonder how this can benefit you. Different people use TVM differently. For example, in accounting, accountants use TVM to recognize revenues earned and interest earned. TVM is especially important to investors because they can generate more money. In a scenario, you invest $1,000 at a 7% rate for 3 years. You would get a return of $11,423.94. If you saved the $1,000 instead, after 3 years you would still have $1,000.
This concept is simple, and can help you figure out what you want your money to do. For example, if you want it to be worth more, you can invest. If you don’t want to grow it, you can just save it.
Written by Allie Chang