Finance
What is The time value of money?
The time value of money is the idea that a sum of money is worth more today than the same amount in the future, because money today can be invested to earn returns. It's a core principle behind interest, loans, and investing.
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Watch a 2-minute lesson with voice + animation that explains the time value of money.
Key things to understand
- 1Money available now is worth more than the same amount later.
- 2Today's money can be invested to grow over time.
- 3It underlies interest, loans, and investment decisions.
- 4Future cash is 'discounted' back to its value today.
Frequently asked questions
- What is the time value of money?
- The principle that money today is worth more than the same amount in the future because it can earn returns.
- Why is money worth more today than tomorrow?
- Because you can invest it now to earn interest or returns, and inflation erodes future value.
- Where is the time value of money used?
- In valuing investments, loans, mortgages, and business projects through present and future value calculations.