Understanding the Time Value of Money
Money that a business has today is worth more than it would be received in the future because they can invest this money and be making money on it now. In calculating the time value of money you consider present value, future value, interest, number of periods, and the payment amount. The present value is the money you have right now, or the starting investment. The longer money is waited for, the more the present value is reduced. The future value is the money you can expect to receive on the investment. This amount will always be greater than the present value.
In planning for retirement, you can consider investing money now, rather than in the future. This is taking TVM into consideration. All those years you might wait to invest would be money lost. Future value would be the return you would receive on your investment. You could decide to receive a check at the end of the investment or reinvest the money. The payment amount is your return on your investment, or what you might live on during your retirement years. The goal is to invest at the highest interest rate possible to reach the maximum future value and be able to enjoy the return on your investment during your retirement years.
For further explanation of the time value of money, including a calculator where you can enter present value, future value, number of payments, payment amount and interest rate, go here: * Finance Calculator
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Published by Janet Hunt - Featured Contributor in Business & Finance
Janet Hunt is a freelance writing professional specializing in business and finance. She has published articles for such online publication sites as Demand Studios, Associated Content, and various other onli... View profile
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21 Comments
Post a CommentMy kids need to read this!
You write great business articles, Janet.
Great job on this Janet.
Awesome read!
Although this is well-written and informative, I must admit that thinking about this stuff makes my head hurt. Math, finances and all that is not my cup of tea. I mainly just make sure there is less going out of my bank account than is coming in. ;)
Interesting article: compounding is magical.
Good work.
I always come away from your articles knowing something interesting! Great work..:)
Yes, great work Janet. The Finance Calculator and understanding what the TVM is all about shows your broad experience and expertise in this and many other realms my friend. Just intelligence and giftedness in writing. YOu are truly a win-win for us all.
Thanks Janet. I always learn from your articles!