What is the principle of "time value of money"?

The principle of the "time value of money" emphasizes that a specific amount of money today is worth more than the same amount in the future. This concept is rooted in the potential earning capacity of money. When money is available today, it can be invested to earn interest or generate returns over time. Therefore, the sooner money is acquired, the greater its potential to grow through investment.

For instance, if you have $100 today and invest it at a 5% annual interest rate, in one year, you would have $105. Conversely, if you receive that same $100 a year from now, you miss out on the earning potential of that money, which effectively makes it less valuable in real terms compared to having it now. This principle is fundamental in finance and economics as it underlies investment decisions, savings, and the assessments of financial products.

Understanding the time value of money helps individuals and businesses make informed decisions related to investments, loans, and savings strategies.