The time value of money (TVM) is a fundamental concept in financial planning. It implies that money received today is always worth more than the same amount of money received at a later date because money available at the present time has the potential to earn more money in the future . The TVM is used to make strategic, long-term financial decisions such as whether to invest in a project or which cash flow sequence is most favorable .
The formula for computing the TVM considers the amount of money, its future value, the amount it can earn, and the time frame. For savings accounts, the number of compounding periods is an important determinant as well .
Inflation has a negative impact on the TVM because your purchasing power decreases as prices rise. Even a slight increase in prices means that your purchasing power drops .
If you’re interested in learning more about TVM, you can visit Investopedia’s website for a detailed explanation and examples .