Time Value of Money
Time Value of Money Concept
Money has time value.The Time Value of Money means the value of money received today is more valuable than same amount received in future.
Lets understand its by example
Suppose I want to buy a house which is worth 5 lakh rupees but I do not have five lakh rupees yet, I buy the same house after 2 years but the price of that house increases with time means 5 lakh is not enough to buy that after two years.because the value of money varies over time means the value of money received today is more valuable than same amount received in future.
The preference for money now as compared to future money is known as time preference for money.The reasons for time preference of money can be stated as follows-
a.)Risk
b.)Uncertainty
c.)Present Consumption
d.)Investment Goal
Our Grandfather or Grand Mother tells us that in the past, everything was very cheap. Earlier, 50 paisa used to get sweets, vegetable and bus tickets but now there is no value of 50 paisa. Its a Time Value of Money.
Techniques of Time Value of Money
a.)Compounding Techniques
b.)Present Value Techniques
Compounding Techniques is finding out the Future value (FV) of present money
In compounding techniques, if you made a fixed deposit of 10 lakh in the bank today, what will be its value after 10 years, how much money will you get from Compound Techniques, we calculate the value found in the future.
Present Value Techniques is finding out the present value (PV) of the future money
In present value techniques, if you have made a fixed deposit of 5 lakh for 10 years but you need the money before 5 years, then the bank will give you that amount with interest that is being made on that date.Present Value Techniques helps find present value of the amount what we get in the future.
Through this article, you must have understood how the value of money keeps decreasing due to inflation, uncertainty, risk.Whenever we invest somewhere, keep in mind that what we will get in the future.
Hope you understand this article Time Value of Money , if there is any question related to this article, then you can ask and comment.
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