Time value of money (TVM)

Meaning:

The Time Value of Money (TVM) is characterized as a fundamental financial principle that posits that a specific amount of money today is more valuable than the

same amount in the future, primarily due to its capacity to earn interest or generate  returns through investment opportunities.

Example: 

For example, investing ₹10,000 today at an 8% interest rate will result in a total  of ₹10,800 after one year, exemplifying the concept that money appreciates over time.

How to Understand: 

TVM is based on several core tenets:

•Money accumulates interest, fostering growth.

•Inflation erodes the purchasing power of money over time.

•Money can be strategically invested to yield additional returns.

Consequently, the deferral of monetary use results in a decrease in its effective value.

Importance:

A comprehensive understanding of TVM is crucial for making informed investment decisions.

It is indispensable for calculating loan EMIs, returns from systematic investment plans (SIPs), and the maturity values of fixed deposits (FDs).

TVM is integral to financial planning, business valuation, and effective budgeting.

It facilitates comparisons between future earnings and the present value of money.

Recognizing the significance of TVM fosters a proactive approach to saving and investing  early in life.