What is the time value of money?

The time value of money is best described by the concept that money available today is worth more than the same amount in the future. This principle is grounded in the idea that money can earn interest or generate returns over time when invested. Therefore, a dollar today will grow in value if it is invested, leading to a greater amount in the future. This concept reflects the potential earning capacity of money and emphasizes the importance of time in financial decision-making.

For instance, if you have a certain amount of money now, you have the option to invest it, earning returns that would increase that amount over time. Conversely, if you receive that same amount in the future, you lose the opportunity to earn interest during the intervening period. Thus, the time value of money influences various financial decisions, such as investment strategies, loan structures, and savings plans. Understanding this concept is crucial for making informed financial choices and maximizing wealth over time.