Time Value of Money
The principle that a dollar today is worth more than a dollar in the future, because it can earn a return.
What does time value of money mean?
Because money can be invested to grow, timing matters: receiving money sooner is more valuable than later, and paying later is better than now. This idea underlies present value, future value and nearly every financial calculation.
Put it to use
Related terms
Time Value of Money — frequently asked
Why does the time value of money matter?
Because money available now can earn a return, it is worth more than the same amount later. This single idea underlies loans, savings, investing and retirement math — comparing dollars across time requires adjusting for it.
What is a discount rate?
The discount rate is the annual rate used to translate future money into today’s value. A higher discount rate makes future dollars worth less now; it reflects the return you could earn plus risk and inflation.