Money today is worth more than the same amount of money in the future.
Let’s break this down simply and explain from multiple angles, along with an example.
💡 1. Basic Idea
Why is money today worth more?
- You can invest it and earn interest.
- It can grow over time.
- There’s uncertainty in the future.
- Inflation reduces purchasing power over time.
✅ $100 today > $100 a year from now
💰 2. Financial Example
You have $1,000 today. You can put it in a bank and earn 5% interest per year.
In 1 year:
- You’ll have:
$1,000 × (1 + 0.05) = $1,050
That means $1,000 today is equal to $1,050 next year.
Or flipped:
If someone promises to give you $1,050 next year, you’d consider that equal to $1,000 today, assuming 5% interest.
📉 3. Inflation Angle
Money loses value due to inflation.
If inflation is 3% per year, then $100 today buys more than $100 next year.
So, you’d rather have the money now to maintain buying power.
📈 4. Opportunity Cost
By waiting, you miss opportunities to invest or spend.
Example:
- You lend your friend $500.
- After 1 year, he gives back only $500.
- You lost the chance to earn interest, say 5% → $25.
- Opportunity cost = lost interest or investment gain.
🔢 5. Formulas
- Future Value (FV):
FV = PV × (1 + r)ⁿ
(What your money will grow to) - Present Value (PV):
PV = FV ÷ (1 + r)ⁿ
(What future money is worth today)
Where:
- PV = Present Value
- FV = Future Value
- r = interest rate (decimal)
- n = number of periods (years)
🧠 6. Real-Life Analogy
Imagine you win a prize:
Option A: Get $10,000 now
Option B: Get $10,000 in 5 years
Which do you choose?
Smart choice: Option A, because:
- You can invest it now.
- You control it.
- Inflation won’t eat into it.
- 5 years is a long wait with no growth.
📚 Summary
| Concept | Meaning |
| TVM | Money now > money later |
| Investing | You can grow money over time |
| Inflation | Erodes future value |
| Opportunity cost | Lost chance to earn returns |
| Formulas | Help calculate exact value shift over time |
