Time Value of Money

Time value of money

The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.

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time value of money

The concept that holds that a specific sum of money is more valuable the sooner it is received. Time value of money is dependent not only on the time interval being considered but also the rate of discount used in calculating current or future values.

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Time Value of Money

A fundamental idea in finance that money that one has now is worth more than money one will receive in the future. Because money can earn interest or be invested, it is worth more to an economic actor if it is available immediately. This concept applies to many contracts; for example, a trade in which payment is delayed will often require compensation for the time value of money. This concept may be thought of as a financial application of the saying, "A bird in the hand is worth two in the bush."

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Time value of money. The time value of money is money's potential to grow in value over time.

Because of this potential, money that's available in the present is considered more valuable than the same amount in the future.

For example, if you were given $100 today and invested it at an annual rate of only 1%, it could be worth $101 at the end of one year, which is more than you'd have if you received $100 at that point.

In addition, because of money's potential to increase in value over time, you can use the time value of money to calculate how much you need to invest now to meet a certain future goal. Many financial websites and personal investment handbooks help you calculate these amounts based on different interest rates.

Inflation has the reverse effect on the time value of money. Because of the constant decline in the purchasing power of money, an uninvested dollar is worth more in the present than the same uninvested dollar will be in the future.

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Time Value of Money

What Does Time Value of Money Mean?

The idea that money available today is worth more than the same amount of money in the future, based on its earnings potential. This principle asserts that money can earn interest and grow, and so any amount of money is worth more the sooner a person has it so that that person can put it to use now rather than later. Also referred to as present discounted value.

Investopedia explains Time Value of Money

Everyone knows that money deposited in a savings account will earn interest. Because of this, the sooner it starts earning interest, the better. For example, assuming a 5% interest rate, a $100 investment today will be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100 received one year from now is worth only $95.24 today ($100 divided by 1.05), assuming a 5% interest rate.

Related Terms:
•  Discount Rate 
•  Future Value
•  Net Present Value—NPV
•  Present Value
•  Present Value Interest Factor—PVIF