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Have you ever heard the saying, "A dollar today is worth more than a dollar tomorrow"? First time? Confused? Concerned?
This simple phrase sums up the concept of the time value of money (TVM), a fundamental principle in finance that affects everything from your savings account to your retirement fund.
STAY WITH ME. You like cash right? Of course you do. You’re going to looooove this then. Let's break down what it means, why it matters, and how you can use it to become a rich little piggy.
Do you know what time value of money is?
Seriously, do you? Because I’m just figuring this out while typing.
Ok, so I just read on some website (definitely not TheOnion.com) that time value of money is the idea that money you have now is worth more than the same amount of money in the future.
I’ve lost me.
Okay, I just read some more and apparently money you have now is worth more than the same amount in the future because money you have now can earn money. Cash begets cash.
Why should I care, you say? I’m unhinged, you claim?
RELAX. Understanding TVM is important because it helps you (an investor and aspiring rich piggy) make better decisions. For instance, if you're choosing between receiving $100 today or $100 a year from now, knowing about TVM would lead you to take the money today, since you could invest that $100 and earn even more sweet sweet cash. You’ll have cash coming out the wahzoo! Painful? Maybe.
How can I do TVM?
Excellent question, and worded perfectly. TVM is an easy tool for everyday financial decisions. Here’s how you can “do” it:
Saving and Investing: By understanding TVM, you'll see the importance of starting to save and invest as early as possible. Even small amounts can grow a lot over time thanks to compound interest, something you’re already a pro at (brag much?) because you learned about it last week.
Evaluating Opportunities: TVM can help you decide between different financial opportunities by comparing the current value of future cash. Imagine you have an incredibly valuable object, like definitive proof that Santa is real (lol, don’t need proof, we know he’s real). And two people, both of whom are green, hairy, and grinch-like in demeanour (probably not important, but I’m just painting a picture) offer to pay you $10,000 to buy this proof. One person offers to pay you today and one person offers to pay you in a year. Which offer is better? The one where you get the money today. GIMME MONEY.
TVM - best for your far-off plans
For long-term investment strategies, TVM is a big boost. The earlier you start investing, the more money you have. Thanks to compounding (sound familiar?), your investments grow more bigly.
What’s a good way to use this magical time-powered cash machine?
Retirement Planning: Would you prefer to retire as an old fart or a young fart? How bout extra young hold the fart? Investing early and using TVM can grow your cash pile way more than you’d expect. Even if you start with a small amount, the power of compounding will help you lay a giant nest egg like a golden goose of unparalleled financial prowess.
Loan Payments: When you borrow cash, TVM will help you decide what’s the best way to pay back the money. The earlier you repay a loan, the less interest you’ll have to pay back over time. I know what you’re thinking “I want to take the money and run!” I like the way you think, but I can’t promote crime in this internationally renowned educational publication. You have to repay your debts, just like the Lannisters. Does anyone ever remember a scene in that show where that family actually paid a debt? I was more distracted by the story arc of that kid who was breastfed at the age of 14 tbh.
Basically, just remember you want to hold on to as much of that sweet sweet cash as possible with your little piggy hooves (or were they goose wings?).
Enough already
Time = cash. I should’ve written just that and saved myself the cash, I mean time. OR DO I? Anyway, invest early to grow your money because compounding works best the more time you have.
Not enough?
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