Time value of money (TVM)

Meaning:

The Time Value of Money (TVM) is defined as a financial concept that asserts  that a sum of money today holds greater value than the same amount in the future due

to its potential to earn interest or generate returns through investment.

Example: 

For instance, investing ₹10,000 today at an 8% interest rate will yield ₹10,800  after one year, illustrating how money appreciates over time.

How to Understand: 

TVM is founded on several key principles:

•Money can earn interest, leading to growth.

•Inflation diminishes the value of money over time, affecting purchasing power.

•Money can be invested to create additional wealth.

As a result, postponing the use of money reduces its overall value.

Importance:

Understanding TVM is essential for making sound investment decisions.

It is vital for calculating loan EMIs, returns from SIPs, and the maturity amounts of fixed deposits.

TVM is utilized in financial planning, business valuation, and budgeting.

It aids in comparing future earnings with present-day value.

Awareness of TVM encourages individuals to save and invest early for better financial outcomes.