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.
Written by Brandon Wyeth, Financial Wellness Peer Educator, University of Illinois Extension, 2017.
Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.