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What is the Time Value of Money (TVM)?

The Time Value of Money, often known as TVM, is the concept that money held today has a greater value than the same money held in the future because of the interest it is eligible to earn.

  • 3,512 Views | Updated on: Dec 26, 2023

A larger quantity of money now has the potential to grow in value over time, a phenomenon known as the Time Value of Money (TVM). It is one of finance’s most fundamental concepts. Cash in hand is more valuable than the identical amount to be paid at some future date. The term TVM refers to the discounted worth of a future sum given the current exchange rate.

    Key Takeaways

    The key factors to keep in mind when considering TVM are

  • Savings
  • Investment
  • Purchasing Power

What is the Time Value of Money (TVM)?

Money earned today is worth more than the same amount earned in the future, according to the Time Value of Money, a fundamental financial theory. This is true because the money you have now may be invested and produce a return, increasing your wealth in the future. (With future money, there is also the danger that the money may never really be paid, for whatever reason.) Often, the Time Value of Money is referred to as the Net Present Value of Money (NPV).

What is the Significance of TVM?

Understanding the Time Value of Money is crucial for investors and retirees looking to maximize their savings. This idea is fundamental in understanding how the world of finance works and may profoundly impact your ability to save, invest, and purchase.

Savings

The time worth of money can determine whether or not you can retire with peace of mind if you have not saved enough for your golden years. Considering your situation, your Social Security check might not be enough to meet all of your monthly needs. In this situation, time equals money. The sooner you grasp this idea and incorporate it into your retirement savings strategy, the better off you and your nest egg will be.

Investment

If you invest some of your money today, it might be worth a lot more. One must balance the potential for loss with the possibility of gain when assessing investment options, as specific assets are inherently riskier and more volatile than others.

Purchasing Power

Due to inflation, people have less money to spend now relative to earlier times. Therefore, deciding wisely on your expenses and spending options would be best.

How is TVM Calculated?

The most basic formula for figuring out the Time Value of Money takes into account the value of money in the future, the value of money in the present, the interest rate, the number of times a year that the interest is compounded, and the number of years.

The formula for TVM, based on these factors, is

FV = PV x [1 + ( i / N)] ^ ( N x T)

FV stands for Future value of money

PV stands for Present value of money

i stands for Interest rate

N stands for the Number of compounding periods per year

T stands for the Number of years

However, remember that the TVM formula might change slightly depending on the situation. For example, the general formula may have more or fewer factors regarding annuity or perpetuity payments. Money’s time value doesn’t consider capital losses or negative interest rates. In these situations, you can figure out the Time Value of Money by using negative growth rates.

Top Best Investment Plans in India

Creating a strategy to achieve one’s financial objectives is the primary purpose of investment planning. The core of any sound financial investment plan should be devoted to arranging prudent management of one’s investments and savings. Let’s know about some of the most well-known investment options.

    1. Public Provident Fund (PPF)

    The Public Provident Fund is a low-risk, long-term investment vehicle that facilitates steady wealth accumulation. It is supported by the Indian government and is used chiefly for retirement planning.

    2. Unit Linked Insurance Plan (ULIP)

    As the name indicates, ULIP is a dual-purpose insurance policy. In addition to providing life insurance, some plans invest in the market to provide greater profits.

    3. Fixed Deposits (FD)

    Many Indian investors utilise Fixed Deposits, a well-known and popular investment vehicle. Typically offered by banks, you may invest your excess cash for a specified term and get consistent returns.

Did You Know?

The Value of Money fluctuates throughout time and is affected by several variables such as supply and demand for monetary resources. Inflation, the general rise in prices of goods and services, harms the future purchasing power of money. Because when prices rise, your purchasing power decreases. Even a little increase in costs will reduce your purchasing power.

Conclusion

Money’s future value is not the same as its present value. The same holds true for money from the past. This is referred to as the Time Value of Money. Businesses might use it to assess the viability of future initiatives. As an investor, you may utilise it to identify potential investment possibilities. Simply put, understanding TVM and how to calculate it will help you make wise decisions about how you spend, save, and invest.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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