What Is Time Value Of Money?
Time value of money means the value of money in the present which will be equal to the value of money in the past. It is also known as the earning capacity of the money. The main concept behind this theory is that money can earn interest over a period of time. Always the value of money is earlier it has been received. Earning capacity of the money can be also referred as discounting factor. Here are the best ways to invest your money.
Investors tend to receive less money then what they would receive in the future. There are many of the investors who prefer to take the money in advance as they think that they can earn more money if they can have the money in their hand rather than having their money in future. Such as the saving account provides you the certain amount of interest, and thus it compounds the money as time passes.
The Present Value And Future Value
The present value of money is known to all of us as stated above but the future value of money shall be also worth understanding. Future value is the sum total of the money that you can get in any of the saving scheme with the interest compounding and shall be received at any pre decided date. It shall be applicable to both the options that s both SIP’s and the amount in lump sum. So through we can see how much we can earn of the money which you invest today and get payment in future whether altogether or in the part payments.
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Basics Of Time Of Value Of Money
The basic formula of the time value of money is as follows:
FV = PV × [1+ (i/n)] (n×t)
Where, FV = future value of money
PV = present value of money
i = interest rate
n = number of compounding per year
t = time period in years.
So these are the components which are needed to be taken into the calculation of the time value of money. The formula here provided is the basic formula which is used generally but there may be some changes in the formula as per the needs of situation and also as per the need of an institution. Such as in the case of the annuity, there may be possible that there are some of the additional or some less factors included in the calculation of the time value of money. But in general sense the formula and components are as stated above.
Effects Of Compounding Period On Future Value Of Money
The number of times the interest is compounding a year is also an important factor when the time value of money is calculated in the present. Such as the more number of times the interest compounds there will be more cumulative interest amount collected on the amount and when the no of times interest compounds is less the cumulative interest amount will be less. So it is necessary that the no of times for which the interest is compounded in year.
This was a detailed overview on the time value of money by FinanceShed, get the maximum value of your money by this analysis.