Time value of money
We know time is very important and valuable to us. In recent days of the modern technology, we can replace the term time with money as well. You can see a lot of people are doing business and having some job. Most of the cases, they are getting money for spending their time there. Accept some kind of royalty income, most of the cases, time is important and money is dependent on the time spending. This is true for many of the purposes and cases. There may be some exception but still it is really interesting to replace the term money with time.
If we have some sort of money at our hand hopefully it will not be as same as the value of the money in the next year. With the change of time the value of the money changers. If you just think about $100 at your hand right now it will not be more than $100 in next 10 years.
There are a lot of factors in the consideration of time value of money matters. Most important factor is the inflation. In several countries’ economics, there are a several or certain amount of inflation per year which is specified by several factors by The Financial Institutions or Central Bank. In Bangladesh, the inflation is about 6%. In this inflation rate, your money will devaluate 6% each and every year that will be a normal set. If you cannot gain more than 6% by a year from your money back then you will lose some sort of money that is due to the time of the Asset. In that case, we can say time value of money is really important.
Source: Image by Mona Tootoonchinia from Pixabay
When we deposit some money in bank and any FI, we are getting some return due to spending time with our money. In that case, The Financial Institutions is providing us interest for our money that is based on the time we are spending the money for giving them as a deposit to them. In this context of view, you can easily understand money is just getting valuated for the time.
For example, if a person has a huge amount of money and he don't spend his money to any purposes and don't deposit the money to Financial Institutions or any other investment sectors hopefully each and every year he will lose 6% of his money for the time being. That is the problem that we need to understand the relation between the time and money. So, whatever the countries we are living, we need to consider the inflation rate and we must try to gain more than the inflation rate so that we can have some positive impact or returned of the money. If we can maintain the inflation rate at least then hopefully we will have the same amount of money after the end of the year. Again, if we fail to do so then we are losing our money and if we can get the higher return than the inflation rate then obviously, we are getting some money after the spending of time.
Source: Image by Nattanan Kanchanaprat from Pixabay
In case of getting higher return, it is really considerable to encourage some sort of risk in the form of investment. So, if the risk-free investment return is about the inflation rate, then it is quite good to have the same amount of money after spending huge amount of time by your money and obviously it will be same as the previous times in terms of asset valuation. That is the consideration matter for any sort of investment and money holding.
Those who are going for invest should think about the time value of money and obviously it is very important for those as well who are holding money for a several period of time so that they can have the utility of the money after a certain period of time. But if these things are not being considered, many can be deprived of the situation of the inflation and time value of money from any Nation. That's why this is a finisher indicator which need to be considered very carefully.
This is all about the basic idea about time value of money today and hopefully in my next posts i'll try to explain in mathematical example about Future Value (FV) and Present Value (PV) of the money and how it is important and changes with the rate of interest in the form of time value of money. Check my next posts to have a better idea on this topic and thank you very much for stopping by.
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