Understanding financial concepts can help you make better decisions. Time and money relate to each other as in “Time is money.” A dollar in your pocket today is worth more than a dollar received five years from now.
The time value of money is the notion that money can grow in value over a given period. You should save or invest today’s capital so that it is worth more in the future.
Present value relates to what the sum is worth today. On the other hand, the future value is what an investment (or a series of investments) made today will be worth later on.
Invest your savings today to have more money tomorrow. This earnings capacity’s potential depends on how you invest the money and earn on its interest rate.
Compounding serves as the basis of the time value of money. By adopting good financial habits of saving money, compounding over time is what builds wealth.
Compound Interest Is Far Better In Building Your Wealth
The power of compounding is the basis of key financial decisions, from your personal savings plan, 529 Savings Plan, retirement, and investment accounts.
There is only a tiny probability of winning the lottery. However, it uses the time value of money calculations (present value and future value) to decide whether to win a lump sum or annual payments.
Lottery winners, after the rush of adrenaline, have a choice to make regarding time and money. Most lotteries allow the winner to take a lower lump sum or an annuity. The annuity option is a series of annual payments.