Time Value of Money

FundamentalGeneral Investing1 min read

Quick Definition

The concept that money available today is worth more than the same amount in the future due to its earning potential.

What Is Time Value of Money?

The Time Value of Money (TVM) is a core financial principle stating that a dollar today is worth more than a dollar in the future. This is because money has the potential to earn returns over time.

Core Concepts:

  • Present Value (PV): What future money is worth today
  • Future Value (FV): What today's money will be worth later
  • Discount Rate: The rate used to calculate present value
  • Opportunity Cost: Returns foregone by not investing

Key Formulas:

  • Future Value: FV = PV × (1 + r)^n
  • Present Value: PV = FV / (1 + r)^n

Applications:

  • Investment decision-making
  • Loan and mortgage calculations
  • Retirement planning
  • Business valuation
  • Capital budgeting

Example: $1,000 today at 7% annual return = $1,967 in 10 years Therefore, $1,967 received in 10 years has a present value of only $1,000 today.

Formula

Formula

FV = PV × (1 + r)^n

Related Terms

Compound Interest

Interest calculated on both the initial principal and accumulated interest from previous periods, creating exponential growth over time.

Dividend

A distribution of a company's profits to shareholders, typically paid quarterly in cash or additional shares.

Passive Income

Earnings generated with minimal ongoing effort, typically from investments like dividends, rental properties, interest, or royalties.

Inflation

The rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money.

Return on Investment (ROI)

A performance metric that measures the profitability of an investment by comparing the gain or loss relative to the amount invested, expressed as a percentage.

Interest Rate

The cost of borrowing money or the return earned on savings/lending, expressed as a percentage of the principal over a specific time period.

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