The Time Value of Money means:
"Money today is worth more than the same amount of money in the future."
Why? Because money today can be invested, saved, or used to earn more.
Simple Example:
You have a choice:
- $100 today, or
- $100 one year from now
$100 today can be placed in a savings account to earn interest, or invested — potentially ending up at a value greater than $100 one year from now. This is why present money has higher nominal value than the same amount in the future.
Tiny Math Example:
- You take $100 today
- You invest it at 5% interest
- After 1 year → You have $105
But if you waited a year to get that $100, you missed the chance to earn extra.
Why Does Time Value of Money Matter?
- Investing – Helps compare if it's better to invest now or later.
- Loans – Shows how much future payments are really worth today.
- Business decisions – Companies use it to figure out if projects are "worth it" over time.
Real-Life Example:
Let's say you're offered:
- Option A: Get $10,000 now
- Option B: Get $10,000 in 3 years
Even a low-risk savings account paying 3% interest would turn $10,000 today into about $10,927 in 3 years. That's extra money you miss if you wait.