You have been given two choices
1. Receive Rs. 10k right now.
2. Receive Rs. 10k in two years.
What will you prefer?
If you know the time value of money, choosing option number (1) will be profitable. Also, for most of us, taking the money in the present is just plain instinctive.
Time value of money is the economical principal which says that a rupee received today is worth more than a rupee received in future.
Valid reasons to take up money right now:
NO RISKS ATTACHED: When you already have the money, there’s no as such risk of never receiving it back!
POWER OF PURCHASING: What 10k could buy in 2005 is not the same as what it can buy today, in 2015. The value of money keeps on changing; one of the reasons behind this is inflation.
OPPORTUNITY COST: The money which you receive today can always be used to invest; it can make you earn interest. Hence, it results in higher value of the same amount in future. In contrast, money received in future cannot begin earning interest until it is received. This lost opportunity to earn interest is called the opportunity cost.
Money is not an organic rigid creature but its value changes with the society and its economic conditions. A 10 rupee note has changed a lot over the years, both in terms of appearance and purchasing power.
Several factors affect the economy such as imports and exports, inflation, employment, interest rates, growth rates, trade deficit, performances of equity markets, commodity markets and a lot more things.
Also, when income increases, people tend to spend more. Consumer spending also plays a vital role in the value of money. Higher demand for imported goods increases demand for foreign currencies and thus, weakens the local currency.
(It is thus advised to purchase India made products, to keep our currency strong!)
Because of variables such as inflation and interest rates, the value of money depreciates as time goes by (due to change in the general level of prices).
Time value of money demonstrates that all things being equal, it is better to have money now rather than later. Time literally is money-the core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.