The time value of money (TVM) is a useful tool in helping you understand the worth of
money in relation to time. It is a formula often used by investors to better understand the
value of money as it compares to its value in the future. Below we’ll go over the in’s and
out’s of the TVM and how you can use it to understand the effect time has on the value of
your money. Provided money can earn interest, this core principle of finance holds that any
amount of money is worth more the sooner it is received. At the most basic level, the time
value of money demonstrates that, all things being equal, it is better to have money now
rather than later. Future value determines what a cash flow received today is worth in the
future, based on interest rates or capital gains. It calculates what a current cash flow would
be worth in the future, if it was invested at a specified rate of return and number of periods.
I have used time value of money to determine how much will be saved in the year with a
certain amount of cashflows in and out. The TVM calculation, was the use of the timeline
to a gain a better interpretation. No certain formulas were used to determine, most formulas
are used by banks to influence decisions. The timeline is the most common tool used to
make better calculations of the cash coming in and going out. It always shows the outflows
of cash in the negative, but the cash is being put to good use to gain in the future. I noticed
that the value of money is worth more now then in the future. With the investment,
investors want to get the most out of their money. A personal example that I can think of is
learning more about the investment of my savings and how my 401k will make an impact
now versus waiting and trying to save on my own personal cash flow. As I am now
understanding the annual percentage rate this will help me in my investment. TVM has
helped me understand in how it impacts my savings. If I have the lump sum of money now
to invest in a home this will be better as interest rates and price increase will not reflect in
my budget in the future. If anything I would have to invest more. Additionally, the cash
flow will be impacted as that could be a negative factor. An example of the financial
decision I used the time value of money calculation (TVM) was determining my retirement
investments' future value (FV). The size of my investment is twelve percent of my gross
income. The time it takes for my investment to grow to its optimal levels can be calculated
using my current age until the age of sixty-five, the age I anticipate I will retire.
I figured my earnings by compounding interest with an interest rate of 2%, 3%, and 4%,
and at different points in time. The TVM calculation helped me discover various returns
and created additional times when an optimal financial worth would allow me to retire
sooner. Utilizing the TVM calculation for retirement investments shows a more significant
profit the earlier I invest, and I will be financially set in the long run. The return on my
contributions now while I am younger supports my financial well-being in the future and
proves to be the better option overall.
My cash flow is impacted because I do not have the liquidity of cash to use now unless I
were to pull out my investment and request a lump sum payment, losing interest income.
The Time Value of Money is basically a theory that states money now is a lot better than
money later due to a few reasons. If you receive money now rather than later then it gives
you more investment opportunities for situations that may occur in the time between. An
example that I can think of where this situation came up was in my personal life when I
was filing my taxes online. After receiving my refund the website asked me if I wanted to
use my tax return to be put toward next year's taxes, I declined and didn't think much of it
but looking back it was the smartest decision in this scenario based on the theory. If I
received a refund and I was likely to make the same amount of money next year, there
would be no reason to put my refund for next year's taxes. If I would have accepted that
offer it would have only taken money out of my pocket and would have resulted in my
savings account being less than what it is today, this means I would have earned less
interest in the long term. I have never really use this time value money calculations exercise
in real life. And not sure I understand the formula to be able to break it down in this class
completely goes over my head. The best example I can think of would be a CD for your
kids some type of trust fund that gains interest over time I have a friend who has a savings
account for a kids that you put money in every month and I guess it will mature until they
are like 21 years old every time she gets paid she deposit money into I believe three
different accounts for her kids and I think they’re all different types of accounts but in the
long run that’s for when she passes on.Now for me and my children I have a whole life
insurance policies that game cash value over time so that’s an investment in in the future
for all of us because I was told is the money matures that if I need it I can borrow them
money that is changed but if I come into a situation where I can’t pay it back then if
something happens to me say a pass on that I don’t have the money I borrowed if I don’t
pay it back I’ll just have what’s left of the policy the $50,000 policy I didn’t really think of
the life insurance policy is a interest that money gaining situation for this discussion but it
fits I think. But then I’d have to go back and actually see how much interest these policies
are going over time to have a complete breakdown for the discussion and unfortunately I
don’t know where that the booklet is that breaks everything down for me. All I wanted for
my kids and myself was too I have a financial cushion because you never know when hard
times will happen. TVM calculations stand for the time value of money. It helps people
understand the value of their money and the time it will gain interest. The formula is used
by investors, which gives a professional insight of the value of your money and its future
rates of its value. The principle of the time value of money means that your money gain
interest if it is invested. If it is not during that time, it will lose the chance to gain interest.
For example, I open a saving and a checking account. Where my checking account helps
me gain more interest with my savings. My saving account gain interest over a current
period no matter my balance of my checking account. The greater the rate, the more interest
you’ll earn in your savings. That’s why over time I work to get APY interest rate which
gives you that high yield saving account. APY stand for annual percentage yield it gives
you competitive returns no balance or a low one which it’s a great return. My decision has
made a great impacted on my cash flow because if my AYP for example was a 2.50 %
within a year I will earn $625 dollars. The calculations I used is that I know if I had about
2,000 and it earns 10% compounding interest every year for five years. Which the
compounding period would be just one year. In mean the first year you can earn about 200
interests. The next year you can earn money for the total value of the compounding period.
Which then would be 1200. By the end of year to you can earn up to 2410. Which you
made 410 and just two years and if you keep going to the end of the five year period
your$2000 dollars will turn into approximately 3210.
