time value of money
The concept that money available today is worth more than the same amount in the future because of its potential to earn returns.
Example
“$1,000 today invested at 7% becomes $7,612 in 30 years — demonstrating the time value of money.”
Memory Tip
TIME VALUE OF MONEY = a dollar today > a dollar tomorrow. Money can grow, so today's money is worth more.
Why It Matters
Understanding time value of money helps you make better financial decisions about saving, investing, and borrowing. It explains why starting to save early for retirement is so powerful and why paying off high-interest debt quickly matters for your long-term wealth.
Common Misconception
Many people think that having one hundred dollars today and one hundred dollars in five years are essentially the same thing. In reality, the money you have now can be invested to grow, making today's money significantly more valuable than the same amount received later.
In Practice
If you have ten thousand dollars today and invest it at a five percent annual return, it will grow to approximately twelve thousand eight hundred dollars in five years. However, if you wait five years to receive that ten thousand dollars, you miss out on those twenty-eight hundred dollars in growth, making the delayed money objectively worth less in practical terms.
Etymology
TIME (passage of time) VALUE (worth) OF MONEY. Money's VALUE changes with TIME.
Common Misspellings
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