3 Things to Know about Time Value of Money

“Time flies over us, but leaves its shadow behind.”Nathaniel Hawthorne

Well, it is true that time flies and indeed it does very fast. Sometimes, you feel that a year passes by and you did not take a look into your finances and you get surprised that you have fallen into a debt trap.   In the same manner, your investment also grows very fast, if you are open to stocks and bonds. Well, if you don’t get positive feelings from the stock market, CD (Certificate of Deposit) rates are not bad either considering they pose minimal risk. In any case, the value of your money increases with time. This is time value for money. It is clearly a zero sum game where the person who saves and invests stand to benefit from it and the person who borrows hurt his or her financial position badly. Whether you are borrowing or you are investing, the time value of money plays a key role in your finance. So, why not understand a little more about time value of money.  Here is how time value of money can be useful.

Future Value of Money

If you invest your money in stocks or bonds or even CD rather than spending on your current consumption, you have not only saved your money from depreciating but also increased the future value of your money. Of course, you need to choose the best option by taking opportunity cost into account. For instance, you have ten thousand dollars and instead of starting an online business, you invested in stocks of an established business. The opportunity cost here is too high, because investing in your own business can multiply your income and offer more return in future than investing in an already established business. Regardless of the choice of investment, the returns are always higher than not investing.

Decrease in Value of Money

Well, if you think that keeping your money at home and letting the time work its magic will make you rich, you are wrong. Money sitting in your safe does not grow because a dollar today will not be worth a dollar a year from now and clearly whatever you are able to afford today is going to be very expensive. Of course, you need to account for inflation because with inflation increasing, your purchasing power decreases. Let your money work for you instead of making it idle.

Borrowing Money Hurts

While time value of money works in your favor as far as investments are concerned. When it comes to borrowing money, the time value works against you. Well, if you borrow a dollar today for your personal consumption, you will have to definitely pay more than a dollar. So, the bank is enjoying the fruits of time value of money. So, why let others take advantage of this important financial secret. Start controlling your borrowings by making a list of absolutely essential items and striking out what is not needed. This way, you can boost your financial health.

How did it get so late so soon? Its night before its afternoon. December is here before its June. My goodness how the time has flown. How did it get so late so soon?”—Dr. Seuss


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