BBC Content Team
Finance: Time Value of Money
Everyone has heard the saying that “Time is Money”. However, this saying does hold credibility to a certain extent. In finance, there is an aspect known as “Time Value of Money”. This concept asserts that the money that is available right now can eventually be worth its value in the future. This assertion however can only be supported with the given assumption that there is a respectable and favorable interest rate present. Therefore, by applying these core principles, the overall concept of “Time Value of Money” can be formulated.
To begin, Time Value of Money, or TMV for short, is created from the idea that many investors are in favor of receiving their money right now compared to some other time in the future. This is because investors truly believe in the ability of money to grow over a given period of time. To further elaborate, investors believe that if they receive their money at the present time, they can them deposit this money into a savings account. In a savings account, this money can then accumulate money because of interest. This money is known as compounding in value, as it can increase in value because of the interest. One example of how TMV really does apply in real life is as follows. An employee has just received his weekly paycheck of $1,000 dollars. Sooner than later, this employee would immediately like to put this money in a savings account. This is because the sooner he puts it into a savings account, the faster and more amount of interest will be generated from this amount of money.
It may not come as a surprise that there is also a formula for TMV. The formula encompasses factors such as the present value of the money (p), future value of money (f), interest rate (i), number of compoundings per year (n), and the number of years (t). Based on these formulas, the formula derived is: F = P x [ 1 + (i / n) ] (n x t) . This formula can be very useful to those looking to exercise TMV, and eventually make more money. All in all, TMV reinforces the saying that “Time is Money” and can be useful everybody if utilized correctly and efficiently.
By Arjun Sheth