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The fundamental principle behind the concept of time value of money is that, a sum of money received today, is worth more than if the same is received after a certain period of time.
Is the time value of money the same as its purchasing power?
The time value of money states that the value of money changes with time. A set amount of money today will have a different “purchasing power” in the future. A simple example is this: imagine you're given a certain amount of money, say a $100 bill. You could go to the mall and buy some clothes, say, 3 pairs of jeans.
Why is the concept of time value of money important?
Time value of money is important because it helps investors and people saving for retirement determine how to get the most out of their dollars. This concept is fundamental to financial literacy and applies to your savings, investments and purchasing power.
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