A fundamental financial concept that is frequently applied in several financial choices is the time value of money (TVM). It is a concept that because of prospective revenue in the interim, an amount of money is currently worth more than it will be in the future (Weber, 2021). Money that is currently in the account has a higher worth than money that will be paid out in the future. TVM is a crucial component of risk management and financial planning processes. Thus, it is crucial to comprehend it and use it in everyday life.
Once, there was a situation when I did not use this concept and got a financial loss, which could have been easily averted to profits if considering TVM. A friend offered to pay off $8,000 of his debt for me, but he questioned if I wanted the money now or in two years when I really needed it. I chose to wait, but after using the concept’s formula, it became clear that accepting the money right away would be more advantageous. My investment would have been worth more if I had used that money to open an account with a 6% yearly interest rate. I calculated that my $8,000 investment would be worth $8,988 after two years using formulae. This shows that taking $8,000 now is more beneficial than waiting two years to earn $8,000 since doing so would net you an additional $988.
This became a good example for me that financing decisions should be made very cautiously. Using such concepts as TVM, it is easier to calculate profits and develop the personal financial situation. Moreover, if you master this ability in daily life, working in a big company or owning a business would be way easier. Thus, TVM is a vital part of any financial decision, which can be beneficial in many instances.
References
Weber, R. (2021). Embedding futurity in urban governance: Redevelopment schemes and the time value of money. Environment and Planning: Economy and Space, 53(3), 503-524. Web.