THE TIME VALUE OF MONEY
The time value of money is one of the most powerful concepts that you will learn on your journey forward. The fundamental concept is that a certain amount of money earned today is worth more than the same amount of money earned at a later date in time, because of interest. Interest is the additional cost, if you borrow, or additional income if you are investing.
WHY DOES IT MATTER?
Understanding this concept is critical because it will help you understand the impact of financial decisions, influence your financial planning, and help you realize the positive impact of investing.
DOES THIS CONCEPT APPLY TO MY DEBT?
YES! This concept applies to you in two ways. First off, you are paying interest on that debt, making borrowing more expensive. Second, instead of investing your money and creating your own wealth, you are obligated to make monthly payments.
Investing $10,000 in a long-term investment with an average annual return of 7%, compounded annually, could grow to approximately $19,685 after 10 years, nearly doubling the amount.
Borrowing $10,000 on a high-interest credit card with an annual interest rate of 20% and making only minimum monthly payments could result in paying over $22,000 over several years
*This will all be covered further in the "Get out of Debt" and "Invest" modules, respectively.
HOW DO I SOLVE FOR THE TIME VALUE OF MONEY?
The time value of money is a simple formula that can be solved using online financial calculators, which can calculate the future value, present value, compounding interest, and discounted cash flows. Considering these factors will help you make an informed decision.
What matters most is that you understand how these concepts impact your financial freedom. When you finance a house or a car, prioritize the total cost over monthly payments. A Financial Forward Truth: If you spend money on something, you lose the ability to invest that money and the ability to make interest (opportunity cost).