The value of money with a given amount of interest earned or inflation accrued over a specific amount of time. This is the central concept in finance theory, which suggests that a certain amount of money today, has a different value, or buying power than the same amount of money in the future. This principle is twofold; there is an opportunity to earn interest on the money and because inflation will cause prices to go up, thus changing the “value” of the money.
There are four primary reasons money has time value:
- Risk and Uncertainty: The future is always uncertain and therefore risky. Outflows of cash are in our control as payments have to be made by us. On the other hand, there is no certainty of future cash inflows, therefore the preference is for receiving cash now.
- Inflation: In inflationary economies, money that is received today has more purchasing power than money to be received at a future date. In other words, a dollar today represents a greater real purchasing power than a dollar a year’s time.
- Consumption: Most people prefer consumption today over future consumption.
- Investment Opportunity: An investor can profitably employ money received today in order to receive a higher value tomorrow.
Leadership Advocate and Co-Founder of the Goldzone Group. I help leaders to master the new rules of leadership for the new economy. Over the past 30 years, I have visited over 500 cities in 54 countries to explore, learn from, and help many of the world’s leading companies, leaders, and luminaries in the fields of science, technology, health, finance, entrepreneurship, and leadership.