Master the fundamental concept that money available today is worth more than the same amount in the future
The time value of money is the concept that money available today is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received.
Key Insight:
A dollar today is worth more than a dollar tomorrow because it can be invested to earn a return.
Present Value (PV)
The current value of future cash flows
Future Value (FV)
The value at a given future date of an amount placed on deposit today
Interest Rate (r)
The percentage charged for borrowing money or earned through investing
Time Period (n)
The number of compounding periods
0-------1-------2-------3-------4-------n
PV CF1 CF2 CF3 CF4 CFn
Cash flows move from left to right through time, with PV at time 0 and future cash flows at various time periods.