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What is the time value of money?

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Quick answer

The time value of money is the principle that money today is worth more than the same amount in the future. Because money can be invested to earn returns — and inflation erodes future value — a dollar now beats a dollar later.

Key things to understand

  1. Money available now can be invested to grow over time.
  2. Inflation reduces what a future dollar can buy.
  3. So a sum today is worth more than the same sum later.
  4. It's the basis for interest, loans, and investment valuation.
  5. 'Present value' calculates what future money is worth today.

People also ask

Why is money worth more today than tomorrow?
Because you can invest today's money to earn returns, and because inflation steadily eats away at future purchasing power.
What is present value?
The current worth of a future sum, found by discounting it to account for the returns it could have earned in the meantime.
How does the time value of money affect loans?
Lenders charge interest partly because money repaid later is worth less than money lent now, compensating them for the delay.
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.
Where is the time value of money used?
In valuing investments, loans, mortgages, and business projects through present and future value calculations.