Money Value Of Time Calculator
If you have never heard of the time value of money (TVM) concept before, it is an important one to understand. This equation deals with your future earning potential, which can be critical if you are thinking about taking out a mortgage in the near future or you simply want to get a better handle on your financial outlook. Continue reading to discover a good start to what you need to know about the time value of money (TVM).
What is the time value of money (TVM)?
There is only one place to begin, and this is by explaining what the time value of money (TVM) theory actually is. This is the theory that the funds you have at this present time are worth greater than the same sum at a later date, as a consequence of the possible earning capacity of the money.
This core financial principle holds that provided your money is able to earn interest, any amount of money is worth more the sooner you receive it. Sometimes, TVM is referred to as a present discounted value.
Delving deeper into the time value of money (TVM)
The idea behind TVM is that investors prefer to get a hold on funds today instead of the same quantity of money at a later date, as they will then have the potential to grow the money over a specified period of time. For instance, they could place the money into a savings account, which would enable them to make money on the funds.
Let’s take a look at an example to give you a better understanding. You are presented with two options:
-You can receive $20,000 off your parents today to put toward a future home
-You can receive $20,000 at the time you’re ready to purchase the property, which you estimate will be in approximately three years
On the surface, you may assume that there is no real difference between the two options; $20,000 is $20,000, right? Well, under the TVM concept, this is not really the case. As per TVM, it would make more sense to receive the money today so long as you can earn from that 20k, or in other words opportunity costs. After all, you could place the $20,000 into a savings account, a CD or government notes and potentially earn interest on it for the next three years.
Time Value of Money in Another Perspective
Time value of money is also used in the securities market, for instance derivatives in the form of ‘option contract’ have an expiration date. The call or put should have a certain value in the option that should decrease over time.
Also, the power of compounded interest plays a factor in the time value of money. For example, using the rule of 72, if you were to gain a 10% return per year compounded, not simple interest, on your initial investment, it would take 7.2 years for it to double. Another example would be, if you get 8% per year compounded interest, then it would take 9 years for it to double. This can be a helpful tool when trying to figure out which investment might meet your needs better.
Money value of time calculator: What is the equation?
The time value of money formula can change a little bit depending on your exact situation. However, there is a general formula that you can follow. So, we will take a look at this below.
The formula for TVM is as follows:
FV = PV x [ 1 + (i / n) ] (n x t)
In this formula, the letters represent the following:
- ‘FV’ represents the money’s future value, which is what you are aiming to figure out with this equation.
- ‘‘PV’ represents the money’s current value. In the example above, this would be $20,000.
- ‘i’ represents the interest rate.
- ‘n’ represents the number of compounding periods per annum.
- ‘t’ represents the number of years. In the example above, this would be three.
By using this formula, you will be able to determine how much a sum of money you have right now is going to be worth at a later date. This can be incredibly useful when it comes to financial planning.
Why is the time value of money important?
Now that you have a better understanding of this concept, you will probably want to know why it matters. Why should you care?
Time value of money is beneficial because it can help to guide any investment decisions you make in the future. For example, let’s say that you have the option of choosing between two different investment projects.
Both projects may have identical descriptions, with only one difference. With the first project, you will get a payout of $35,000 within the first year. However, with project B, you will get the same payout, yet in year five.
If you don’t anticipate needing the money within the next five years, you may see no real difference between the two. However, by using the TVM concept, you can determine whether project A is a lot more lucrative.
Final words on using a money value of time calculator
So there you have it: a great start to what you need to know about the time value of money (TVM) concept and using a money value of time calculator. We hope that this has helped you to get a better understanding of your future earning potential. This can be an important tool if you’re saving for a mortgage or plotting your financial future.