Time Value of Money (TVM)
Candlefocus EditorThe formula for working out the Time Value of Money (TVM) takes into consideration the present sum of money, its future value, the amount it can possibly earn over the given period of time, and the number of times it will compound. An example of this is a saving account, where the more often the interest compounds, the more money the investor earns. In other words, the amount of interest it earns also depends on the number of compounding periods, and this needs to be taken into consideration when calculating the possible time value.
Inflation is one of the biggest factors, which affects the Time Value of Money (TVM). This is because inflation generally causes prices of items to increase, and it means that the money an investor has saved would no longer be worth the same amount in the future due to the rising cost of living. This means that the purchasing power is lower when the same sum of money is later needed in the future.
In conclusion, the Time Value of Money (TVM) is an important concept to grasp when it comes to monetary evaluation. It highlights the need to invest money now rather than wait until the future, and to also consider how factors such as inflation, the amount of money and the amount it can earn as well as the number of compounding periods can affect the money’s value over time.