What is the time value of the money?

The time value of money is a concept that states that money resources are currently more worth more than they will be in the future. Therefore, individuals who have educated themselves in this concept would always prefer to receive a payment now a place later. The principle of interest is essential for this idea. $ 100 (USD), which is now invested in an account -earning interest rate by five percent, will be worth $ 105 per year. If the same amount was detained for a year, only at the end of this time range would cost only $ 100. The same $ 100 of the above example would be $ 125 at the end of five years, with the same five percent interest rate. This is known as the future value of money.

The current value of the money, as it concerns the time value of the concept of money, is a little more difficult to calculate. The current value of the amount received today does not change. Therefore, 100 USD received today has a current thrownote $ 100. However, the present value changes when you relate to the amount of money that will be received in the future.

To determine the current value of money for the amount that will be received in a year, we have to determine how much money would have to be invested today to bring the same final amount. That $ 100 USD no longer has a current value of $ 100 if the year is detained.

6 At an interest rate of five percent, $ 100, which is detained for a year, has only $ 95.24. This is because $ 95.24, if it is received today and has invested in five % interest, would bring $ 100 at the end of that year. The longer the amount of money is detained, the greater the value loses.

The popular term "Time is money" has proved quite accurate when considering the time value of money. This concept is essential to understand the importance of investment. Simply by holding the amount of money in an interest account, you can literally turn time for money by waiting.