Time Value of Money

Wikipedia describes it as “the value of money figuring in a given amount of interest earned over a given amount of time.  To investopedia, it is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”  And to lottery winners who discover they can only get roughly half of what they won if they want the money up front, it’s a bunch of crap! But make no mistake about it; the time value of money concept is one the most fundamental in all of finance- personal, corporate, or investment.  It serves as the basis for everything from compounding interest to the valuation of firms and is critical to understanding, and ultimately making, any long-term investment decision.  But far from overly complicated, it is too often misunderstood or, at least, taken for granted.  If you don’t believe me, ask your friends how many of them stash away $20 or $30 each month knowing the power harnessed inside this simple concept.  Or ask yourself why in the world you loaned your friend $50 with the expectation of receiving exactly $50 at a later, perhaps much later, date. Or, going back to our earlier example, sit down with one of so many lottery winners who are angry when they learn that they’re really not millionaires.  Not right away, at least. Read more of this post