Time value of money

Time value of money is a very interesting concept of economics. Putting in very simple words,  it means that any amount of money that is received today is more valuable than received in future. The amount of money you hold today is more worth because you can invest it and earn interest in the future. Technically,  time value of money is the potential of money to grow in value over time by comparing present value of money to it’s future value.

Hence, Time Value of Money (TVM) is the idea that money that is available at the present time is more valuable than the same amount received in future. The sooner the money received is anytime better than the received in future. 

TVM is also known as ‘Presented Discounted Value ‘ and it is a important concept of Financial Management. It is derived from the concept of interest.

Let’s take a simple example to understand this. Say, there is a interest rate of 5% which means if we deposit 100 rupees today, in future it will worth rupees 105. However if the same amount is invested after a year,  than 100 rupees will worth only 94.25 today (100 divided by 1.05 ). This simply implies money invested at the earliest is anyways better.

The concept of Time Value of Money (TVM) is quite useful in many ways. It plays a important role in Business Finance, Consumer Finance,  and Government Finance. It helps people to find out the present value of money and compare it to make future payments, thus help in making various decisions like compare investment alternatives, to deal with the issues of loans,  mortgages,  lease, etc. Further, helps in finding future value to money for certain and uncertain payments by using mathematical formula for calculating risk free rate of return.

Hecne, TVM is a very basic concept of economics that can really prove out be very important in decision making of various transactions. It is always good to have money today and invest it than any late in the future. If invested today, the future value of money is always higher than present value. Thus,  the money that is received at a point of time is always more worth than the money recieved any time in the future.

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