Time value of money

The time value of money (TVM) is this simple idea: a dollar today is worth more than a dollar in the future.

Not because the future dollar is “imaginary”, but because money today can do things money tomorrow can’t: it can be invested, it can reduce risk, and it can buy things before prices rise.

Why “today” is worth more

Opportunity cost: money can earn returns if invested. If you delay receiving it, you give up that growth.
Inflation: prices tend to rise over time, so the same amount of money usually buys less later.
Risk and uncertainty: the future is uncertain. People usually demand compensation for waiting and taking risk.

Two tools TVM gives you

TVM shows up everywhere, but it often boils down to two questions:

Future value (FV): “If I have money now, what could it become later?”
Present value (PV): “If I get money later, what is that worth in today’s terms?”

A tiny example (no finance jargon required)

Suppose you can earn 5% per year on your savings (after costs).

If you have $1,000 today, then after 1 year you’d have about:

FV = 1000 × (1 + 0.05) = 1050

Flip the question: if someone promises you $1,050 in 1 year, what is that worth today (at 5%)?

PV = 1050 / (1 + 0.05) = 1000

That “5%” is often called a discount rate. In plain language, it’s your “waiting + risk + inflation” adjustment.

Key implication: TVM changes decisions

Saving: saving earlier gives your money more time to grow.
Borrowing: borrowing pulls money forward in time, but you pay for that convenience (interest).
Investing: you’re trading a certain amount today for uncertain cash flows later, so you need a way to compare them.
Valuing “deals”: “pay now vs pay later” is a TVM question, even for everyday purchases.

Risks of not doing anything (the hidden TVM cost)

TVM isn’t only about “investment returns”. It’s also about risk management over time. When you delay building a buffer, skills, or resilience, the future can become more expensive.

Health issues: small problems can become larger ones, and lost health often reduces your ability to earn and enjoy time.
Unemployment intervals: job gaps happen. Without savings, you may be forced into bad options (high‑interest debt, rushed job choices).
Industry and aging shifts: skills can become less demanded. If you wait too long to adapt, it can be harder to reach (or keep) a well-paid role.
Rising costs: taxes can change, markets can change, and inflation slowly raises the cost of “the same life”.

A practical way to use this on the site

If you use the calculators here, TVM is the underlying reason why “a little earlier” matters. It’s why consistent saving, reducing expensive debt, and building a stable baseline (see Basic needs budget) tends to compound into large differences over time.