The Time Value of Money
Why a dollar today is worth more than a dollar tomorrow.
SpreadsheetThe Core Idea
Money available now is worth more than the same amount in the future. This is the time value of money (TVM) — one of the most fundamental concepts in finance.
The reason is simple: money you have today can be invested and earn a return. If someone offers you €1,000 now or €1,000 in five years, the rational choice is always now — because you can put that money to work immediately.
Future Value & Present Value
TVM boils down to two directions:
- Future Value (FV) — what a sum today will be worth at a future date, given a rate of return.
- Present Value (PV) — what a future sum is worth in today's terms, discounted back at a given rate.
The formulas are straightforward:
FV = PV × (1 + r)^n
PV = FV / (1 + r)^nWhere r is the interest rate per period and n is the number of periods.
Why It Matters
Every financial decision — from mortgage payments to retirement planning to valuing a company — relies on TVM. Ignoring it means ignoring the cost of waiting.
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