Who wants to be a Multimillionaire?
Hurray! You just won a prize of Rs.1000.Now you have two options
- Receive the prize now
- Receive the prize after a year
If such a scenario ever happens, which option will you go for?
By natural instinct most of you will choose to take the money now. So at the most basic level, we demonstrate a time value for money which says that all things being equal, it is better to have money now rather then what happens to the money in the future than in the present?
The time value of money is fundamental concept in money education. Have you heard of your grandparents talk about how prices have gone up or how things used to cost less when they were young? Have you ever wondered why the price of commodities goes up? One of factors for rise in price is the time value of money.
What is the time value of money?
If you have Rs.100, you can buy a lot of things with it. But Rs.100 now will not be worth Rs.100 after five years. If to spend that money to buy ‘X-’ or less than what you can buy today.
By keeping yourself away from money, you are accepting discomfort and therefore, if you have to sacrifice money now, you will demand more money in the future.To understand better let’s look at one more term – Future Value Of Money/
What is the future value of money?
Future value is the value of money or any other asset at a specific future date.
There is a formula to calculate the future value of money.
Say you have Rs.1000 now you keep the money in the bank, the bank will give you interest at the rate of 8% per year.
F- Future Value
P – Present Value
R – Rate Of Interest
N – Number Of Year
So in our example
F = 1000*(1+8/100)1
Therefore, In one year, time value of money goes up by Rs.80
This calculation demonstrates that time is money in the literal sense too – the value of money you have now is not the same as it will be in the future and vise versa. So, it is important to know how to calculate the time value of money so that you can differentiate between the worth of money and its potential to offer you returns at different times.
Say you save Rs.1000 now rather than spending it on impulsive buys like toys you don’t need or junk food. If you can save that money in a bank and earn an interest of 8% per year, your savings will be worth Rs.50,000 in 15 years. So start saving early to be multi millionaires, as time has value and the earlier you encash it, the richer you will be.