Time Value of Money

Definition

The Time Value of Money (TVM) is a financial principle that asserts that a specific amount of money today is more valuable than the same sum in the future. This is due to the potential earning capacity of the money, which can earn interest or generate returns over time.

Example

If you have $1,000 today and invest it at an annual interest rate of 5%, in one year you will have $1,050. Conversely, if you receive $1,000 a year from now, it is worth less than $1,000 today because you miss out on the interest you could have earned. The $1,000 you receive in a year's time will have less purchasing power and you lose the chance to earn a return on it.