The time value of money is all base upon the idea that money is available at the present time is worth much more than the money to be double the sum in the future.
Many are aware of the fact about ‘what money is’ and ‘what money does!’
But the time value of money can be determined not by our jobs nor by the way we think and feel about money but by its needs, time and necessity.
If you ask a labour man his value about money, then it would be completely different from that of a rich man.
Hence the value of money is largely based upon the need and necessity of an individual at the moment.
The concept of time value
The concepts of time value of money (TVM) comes from the idea that rational investors prefer to receive money today rather than the same amount in the future because the potential of the money to grow in value is base on a given time.
For example, money deposited into a saving account earns a certain amount of value (interest) at a particular time.
In another example, let us assume that you have the option to choose between receiving 15,000 Rupees today versus 15,000 Rupees in two years.
It is understandable that most people will choose the first option despite the value of money is the same.
This is because the time value of money (TVM) comes into play. Here the time is the main factor that determines the value of money, even though the amount is the same.
How to determine the time value of money
Because money is important, it is advisable to determine it’s a time value in order to add more value to the money.
Depending upon the exact time and situation, the time value of money can be calculated based on many variables.
- FV- the Future value of money
- PV- Present value of money
- i- interest
- n- the number of compounding years
- t- numbers of years
Hence, FV=PV x [1+ (i/n)] n x t
Based on the above formula you can easily calculate the time value of your money.
So we can say that the Future money = Present money + Time
Important of Time Value of Money
Time value of money is one of the basic fundamentals in all finance.
The core value stems from the fact that 1 rupee in your hand today is much more valuable than a 1 rupee that you will receive in the future.
So, valuing the money that you got today will help you to increase its value in the future.
Investing the money at the present moment is far more rewarding than waiting and investing it, in the future.
The time value of money speaks about how important it is to have the money now than in the future.