Time Value of Money

Topics: Time value of money, Investment, Net present value Pages: 5 (2104 words) Published: August 15, 2006
Time Value of Money
The time value of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The time value of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the future by the amount of interest we can earn with the money. If $90 today will accumulate to $100 a year from now, then the present value of $100 to be received one year from now is $90. To fully understand time value of money one must first understand a few terms. Present value and future value are totally different. They also have their disadvantages and advantages; it just depends on how they are used. Of course, present value is what you have right now at this present time. While future value is the amount of money you will have at a given time in the future. Future value has a tendency to be deep; meaning that who knows the future. Interest rates fluctuate everyday; so one can be losing while the other is gaining. Money is known to be worth more now in the present time than in the future. It is worth more now because you can invest it and earn interest. Ben Franklin once said, "The inherent ambiguity of the value of time promotes accommodations and rationalization and may explain the rather obvious observation that most people are a lot more willing to waste time than money." Money is easy access, whereas the opportunity cost for time is vague. Money is readily exchangeable, time is not, and it is perishable. So observing this statement, money will always be around. Time never goes backwards only forward. If you actually think about it, people have plenty of opportunities each and everyday to spend (or waste) their time, but the transactions may be more informal than those involving money. So, when considering the present and the future, there is an enormous decision to make.

Time value of money serves as the foundations of notion in finance. Finances are the way of life when handled properly. Finances help map out time accordingly; meaning that several situations or circumstances may arise so knowing where the money is going to come from will help balance the situation. Several institutions such as banks and investment companies are just a few institutions that serve as financial stability. They evaluate credit on individuals and glance at what can be afforded. Their ultimate goal is for their customers to reap the best reward or benefit when it comes to money. Making your money grow productively is important. Saving money now helps to secure your future. Valuing the time of money means putting money in the proper place in order for it to prosper to its fullest; that is where financial advisors come in play. Organizing your finances to distinguish between savings and investments can be difficult; it just depends on your status. Think of savings as money set aside to take care of needs and emergencies as they arise such as car or home repairs and doctor visits, as well as planned expenditures in the future such as putting a down payment on a home. Investing your money is more for the long term, such as retirement or even inheritance for the loved ones that are left behind. Security of anyone's money rather than rate of return is more important because you want the money to be available when needed. So investing might not mean all the money just a portion of it to see how it will mature. So the circumstance will always determine the way money is handled. CDs and money market accounts are a few common ways to invest your savings money, because interest fluctuates at different locations and times of the year. These short-term investments are commonly referred to as cash. Putting your savings into...

References: Wikipedia contributors (2006). Time value of money. Wikipedia, The Free Encyclopedia. Retrieved 17:00, February 24, 2006 from http://en.wikipedia.org/w/index.php?title=Time_value_of_money&oldid=40860504.
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