Time value of money is a concept that represents the fact that money now is better than money received later. Therefore, an individual must consider the changes in the value of money across time. There has to be an interest rate that equates to the value of money in the present and the future. This change in the value of money is caused by the entity’s failure to receive its money at the end of the day. Therefore it is important to account for the risk factor. Additionally, by not receiving the money now and opting for later, the individual foregoes the potential earning of the initial investment. Get legit paper wring services on Time Value of Money and Financial Decisions.
I intend to apply my understanding of the concept in my personal life. I would rather collect money in the present than collect the same amount in the future. If I opt for the future, there is a need for an interest that compounds the money so that the future value is as valuable as the present value. This requires me to access the current economic climate and how the value of money can change across time. Therefore, the preferable investment opportunity is the one that rewards the present value of money.
A financially sound future involves me having adequate resources for my sustenance with a low risk of loss. Considering the time value of money, I shall forego present consumption for potential future benefit. The appropriate opportunity would be the one whose interest rate is at least as equal as the market interest rate. To account for the risk of investment loss, I ought to diversify the allocation of financial resources. This is so that the present investment does not compromise my financial future. Therefore, the most important concept under the time value of money is the interest rate.
Time Value of Money References
Baehaqi, A., Birton, M. N. A., & Hudaefi, F. A. (2020). Time value of money in Islamic accounting practice: a critical analysis from maqāṣid al-Sharī ‘ah. Journal of Islamic Accounting and Business Research.
Fanozzi, F. J. (2020). Finance: Capital Markets, Financial Management and Investment Management.