The time value of money is an interesting concept that many businesses are built around. It says that the money you currently have is more valuable than the same sum of money you’ll receive in the future.
The money you have available right now can get you access to more financial benefits, right now.
What is Time Value of Money?
The difference between the value of money in the present and future is because of the opportunity cost associated to waiting for the money. You might miss your investment opportunity if you don’t grap the money know. Then there’s also inflation. Inflation gradually decreases the value of your money as well.
If you’re lending your money to someone for a ling time, you’ll want a larger sum of money back. The extra amount you get for your money compensated your financial loss for not having your hands on the money for a specific period of time.
For example; if someone owes you $10,000 right now, but offers to pay you $11,000 the next year instead, would you take it? Well, that depends. You’ll have to access if you can make more money by investing it elsewhere in the same time period.
Similarly, the trust factor and your current needs also count. So there are multiple things to consider here.
Why Does It Matter?
The act of understanding the time value of money is very important. That’s because most of the economies and business rely on this principle. You’ll also have to use this logic in your daily financial decisions.
Investors lend you money and make profits by the interest rate you pay. Your goal is to decrease the cost of money to you and maximize the profits you make in the lending period.