Time Value of Money: The Guiding Principle for Your Financial and Investment Decisions

Published On 16Nov2022
Time Value of Money: The Guiding Principle for Your Financial and Investment Decisions
What is TVM?
The time Value of Money is the concept that the current value of your money is more than it will be in the future. This is primarily because of the reason that you can multiply and increase your current money by investing it. Hence, the time value of money plays a vital role in determining your financial and investment decisions.
The time value of money can help you take numerous decisions such as;
 Determining which job has a better salary potential
 Determining a good rate for a loan
 Determining that the investment you are considering has the potential of yielding profit returns
How Does the Time Value of Money Work?
The significance of the time value of money can never be denied as even if you put your money in a saving account, it is likely to grow over time yielding compound interest.
Several factors such as inflation impact the TVM. For example, several years ago you could buy a plot or even a house for several thousand. But now, you can barely afford the basic expenses for thousands. However, if invested in some house at that time, the value of thousands would have increased manifolds (probably up to crores). Hence, the basis of the time value of money is investing; due to which it is a determining factor for almost all financial and investment decisions.
Time Value and Purchasing Power:
The time value of money is affected by numerous factors such as inflation and purchasing power. Inflation negatively impacts the time value of money and your purchasing power is also affected as a result.
As a result of inflation, the value of your money erodes. Moreover, if the inflation rate is higher than your ROI then you are at loss in terms of your purchasing power.
How to Calculate TVM?
You can calculate the time value of money by a simple formula:
Future value of money= PVx( 1+ i/n) (nxt)
Where PV is the present value of the money, i is the expected return that can be earned, t represents the time period, and n denotes the number of compounding periods of interest per year.
In short, the time value of money helps you take almost all the significant decisions of your life including understanding your personal finances, determining loan terms, your retirement plans, and the future value of your dollars.