The time value of money (TVM) is perhaps the most crucial concept in personal finance. It means that an amount expected to be received or paid out in the future is not equivalent to those received or paid out today. It is easy to understand that an amount received today is worth more than the amount received five years from now because today’s amount can be saved or invested, and in five years, you expect it to be worth more than what it is today. Therefore, the time value of money involves two components: future value and present value.
It also reflects that money today has a greater purchasing power than the same amount in the future due to inflation.
It’s rightly said: Time is money!
Suppose a person is given a choice to receive Rs 1,000 today or after two years. Which option should the person choose?