Time value of money (TVM)

Meaning:

The Time Value of Money (TVM) refers to the financial principle that states  money available today is worth more than the same amount in the future because it can

earn interest or be invested.

Example: 

For example, if you invest ₹10,000 today at an 8% interest rate, it will grow to  ₹10,800 next year, demonstrating that money increases in value over time.

How to Understand: 

TVM is based on several concepts:

•Money earns interest, allowing it to grow.

•Inflation can reduce the purchasing power of money over time.

•Money can be invested to generate additional income.

2.Therefore, delaying the use of money decreases its effective value.

Importance:

TVM is crucial for making informed investment decisions.

It is necessary for calculating loan EMIs, returns from systematic investment plans (SIPs), and fixed deposit (FD) maturity amounts.

TVM is applied in financial planning, business valuation, and budgeting processes.

It helps compare the value of future earnings against today’s money.

Understanding TVM promotes the importance of saving and investing early.