The Time Value of Money (TVM) refers to situations involving the exchange of something of value (money) at separate points in time. Basically all investments relate back to the exchange of money at a certain point in time for the rights to the future capital associated with that investment. In very simple terms, the TVM proves the idea that a dollar today is worth more than that same dollar amount tomorrow; it shows the impact that time has on money.
Say you are considering putting $10,000 dollars into a savings account today that would earn 3% interest.
In 1 year that $10,000 dollars would be worth $10,300.00
In 5 years that $10,000 dollars would be worth $11,592.74
In 10 years that $10,000 dollars would be worth $13,439.16
In 20 years that $10,000 dollars would be worth $18,061.11
As you can see above, because interest (earned in one year) continues to earn interest (later years), your original investment grows by just letting the TVM work its course. This is a very basic example, but it shows the importance of the TVM and how it can impact your investment.
So remember, take advantage of time! The more you invest now, the more that investment will grow in the future.
If you would like to see more real life examples schedule a “Steps Toward Investing” workshop with the Financial Wellness Peer Educators where we can talk more about the effects the TVM can have on a portfolio or retirement account. You can also schedule a one-on-one appointment with a peer educator by emailing firstname.lastname@example.org.
The time value of money concept is one of the most important factors individuals face when it comes to investing assets. Time value of money is the idea that money available today is worth more than the same amount of money available at a future date, because of interest earning potential.
Let’s say you are offered $100 today, or were given the opportunity to collect $100 one year from now. Would you take the money now, or later? Your best option would be to accept the $100 today, because of interest earning potential and opportunity cost.
Taking the payment today would allow you to invest your money in a savings vehicle like a savings account or money market account. Investing your money allows you to earn interest, meaning the bank is paying you a small percentage for using your deposited funds. Therefore, depositing your money in a savings account will allow your money to grow every year.
Going back to the example, the opportunity cost of choosing to defer a $100 payment today is the interest you could have earned through investing your money. Opportunity cost is a trade-off between what you chose and what you could have had. For instance, if you pay $10 for a movie ticket, your cost of attending the movie is not only the $10, but also the time and value of what you could have enjoyed doing instead of going to the movie. That being said, when choosing to spend or save your money, it is important to think about the opportunity cost of your decision, making sure that the benefits outweigh the costs.
The main idea of the time value of money is that as a young investor, you should start saving as soon as possible! The sooner you invest, the higher your interest earning potential, and thus, the more likely your money will grow over time.
Stocks, bonds, and IRAs – oh my! Where should a young investor start? The recorded webinar, “Steps Toward Investing,” explores investment options and strategies. Learn about important investment concepts such as diversification, purchasing power risk, and market risk. Don’t miss out on the opportunity to have your money grow; learn how to invest while you’re still young!
This is a Saving Badge eligible program, so make sure to take the quiz after watching to get credit!
“Steps Toward Investing” is part of the Get $avvy: Grow Your Green Stuff webinar series. Don’t miss the next webinar, “Making the Most of Job Benefits,” on Tuesday, February 24, from 4:00-5:00 p.m. Register here.
Published by O’Reilly as a part of the Missing Manual series, Personal Investing: the Missing Manual provides step-by-step guidance on preparing to invest, choosing and buying investments, and managing investments in easily understandable, engaging, language mixed with a small dose of humor. The introduction aptly points out the investment is a necessary step in one’s personal financial journey, not a choice. It is impossible to accumulate sufficient funds for costly life events such as retirement, education, and vacations with social security and savings accounts alone, given how rates of interest compare with the rate of inflation.
Part 1 of Personal Investing: the Missing Manual focuses on setting your investment goals and cleaning up your finances so you can be better prepared to invest. Part 2 explains how investments work, including funds, stocks, bonds, real estate and investment trusts (REITs), and ends with a discussion of managing a portfolio. Part 3, on investing for retirement, education for children, and health care, may seem less relevant to college students at this point in their lives. However, it is never too early for college students to begin planning for the future as they prepare to graduate and enter the workforce. This ebook is essential for anyone with a new career or unfamiliar with key investing concepts and advice.
Note: This ebook can only be accessed on campus or off campus with your University of Illinois at Urbana-Champaign NetID. If you do not have access to this ebook, please request a print copy through your local public library.
In seeking to improve your financial knowledge, don’t forget about the University of Illinois Library’s resources. Subject experts and print and e-resources can aid your understanding and help you make more informed decisions when it comes to your personal finances.
The Library has many ebooks and books in print that can provide guidance on borrowing, earning, protecting, saving & investing, and spending. Watch for more “Spotlight on Library Resources” posts, in which we’ll feature a particular e-resource that falls into one of these categories.