The Time Value of Money
- The time value of money (TVM) basically states that a dollar now is worth more than a promised dollar in the future due to the investment potential your dollar has.
- TVM shows that saving money now, paying off your loans, and staying out of debt now is worth more than planning to do these things sometime in the future.
- Use some trusted TVM calculators to understand how it may impact your future finances.
The Time Value of Money
Have you ever wondered how much your money will be worth five, ten, or twenty years from now? The time value of money (TVM) principle illustrates the effect of interest on the monetary value of your loan or investment. The basic premise of TVM states that, as long as money can earn interest, money is worth more the sooner it is received. In other words, a dollar now is worth more than a promised dollar in the future due to the investment potential your dollar has.
So what does this mean for you?
If your money is worth more now, then you'll want to take steps to save money now, pay off your loans, and stay out of debt. As you complete this process, you'll be able to use the money you save to invest in the future. By investing your money now, it will accrue interest and provide you with much more money. If you wait to pay off your loans and use that money to invest, the money you invest in the future will be worth much less because it will not have nearly as much time to accumulate the interest it would have if you had invested it sooner.
All of this information about the time value of money may sound interesting, but how do you use this information to calculate the worth of your investments and the impact of your loans on your future finances? Here are a few links to some time value of money calculators that may help:
- MSN Time Value of Money Calculator. Allows you to adjust several variables and provides a graph to help you better visualize the value of your investment over time.
- Financial-Calculators TVM Calculator. Provides detailed options to adjust variables to more accurately predict the impact of your loans and investments on your finances, including how long it will take you to pay off your loans, etc.
- American Century Time Value of Money Calculator. Provides a helpful explanation of each variable and the impact your investments will have on your future finances.
While we do not endorse any specific calculator, website, or financial institution, we find that the above calculators are helpful in beginning your own research on this subject. If you have any questions or concerns, please speak with a trusted financial professional or contact us.