Time Value of Money

I clearly remember riding in the backseat of a friend’s car a few years ago. We were listening to her mom talk to her daughter (my friend) about something involving finance and car insurance. To this day, I am only able to recall 5% of their long and winded conversation; I have internalized, however, the adage she gave me that “one hundred dollars today is worth more than one hundred dollars tomorrow”. It made me a question, “What is the time value of money?” Let’s analyze what she meant in this blog post.

TVM (Time Value of Money) is a core principle of finance. It illustrates an original investment, that can earn interest eventually, is worth more the sooner it is received. This makes sense because if you have the choice to begin earning interest (more money) on a sum of money even two days earlier, then you are better off. People should also want the money sooner than later because the ability to invest money in securities (either stocks or bonds) has the potential to pay off well in the future, increasing the value of your original investment—securities relate to any tradeable financial asset whether that be common stock or bond.  

The formula to find the TVM is super simple, so feel free to use it when determining the value of your next investment:

FV = PV x [ 1 + (i / n) ] (n x t)

• FV = Future value of your money

• PV = Present value of your money

• i = interest rate on your money

• n = # of compounding periods/year
  • Yearly Compound= 1; Quarterly compound= 4; Daily compound= 365

• t = # of years

We will explain the wonders of compounding interest rates in another blog post, but for now, here is a hypothetical situation:

A friend offers to give you $100 at a 6% annual interest rate today or $105 one year from today. Which should you take? Hint: Use the formula to help solve!

About Vola:

Vola Finance can advance you up to $300 at NO INTEREST. Vola Finance can make sure your bank balance does not get too low and alert you before it does so that you don’t pay overdraft or NSF fees. Furthermore, Vola Finance breaks down your spending pattern to help you budget your upcoming expenses and find ways for you to save.

Vola supports over 6000 banks and credit unions and uses one of the nation’s largest bank connection providers to securely establish a link to your account.

Vola is transparent. There are NO HIDDEN FEES Vola operates by charging a subscription fee, there are no other charges. If the features offered by Vola are not compatible with your bank or phone, Vola Finance will refund you your subscription fee.