Time Value of Money
The time value of money is the pillar on which all financial analysis is based on. It is the concept that a dollar received today is worth more than a dollar in the future. Inflation, the cost to borrow money and time are the three key components to the time value of money theory.
Today’s value of money is worth more today than it will be in the future because of inflation. So to protect yourself from inflation, you invest your money at a rate of return (interest rate) to grow your investment, including compounding interest. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. One of the most fundamental concepts in finance is that money has a time value attached to it. In simpler terms, it would be safe to say that a dollar was worth more yesterday than today and a dollar today is worth more than a dollar tomorrow.
An essential step in solving any TVM calculation is to identify the total number of compounding periods per year. Changing the number of these periods does not change compounding concepts, but it does affect the interest rate and period of time (years/months).
Time Value of Money Calculator
This is a simple calculator to use. Simply enter the interest rate for the current cost of borrowed funds, ie the discount rate. Then enter the term of the loan in years and months. And lastly enter the frequency of payments, ie monthly, then the “Present Value” of the investment. The Future Value will be provided as the answer. Good luck and enjoy!