After reading the article time value of money, one cannot help but realize that time and money are relative and they influence each other. For any investor planning on making an investment, money and time are the investors precious items and if well analyzed and manipulated than financial gains are recognized. Economically, the time value of money is an idea that the amount of money one is holding today will be equal less value in future. The article by Louise Fairsave Time value of money is a case in point that illustrates how time and money are related and how both factors are manipulated to make profits.
In the article, the idea of the time value of money is borrowed from Benjamin Franklin theories such as time is money from the quote the author has stated that a person who has $100 in hand today, can have more in the future that is if the money is invested. When one invest capital in a business or project, the expected results are acquired in the future. When one invest in business, the company is likely to give the investor interest, and the money will be worth more in the future. However, the author acknowledges that the value of money based on time depends on the inflation rate. When the inflation rate is high and expected to rise, the currency rate consistently is devalued, and therefore the investment will at the end be worth less in purchasing power.
Time create the ability to increase the total sum of money invested. However, if the investment method of choice fails or decline in value, then the investment accumulated will lose value. The author has given an example of buying shares or investing in a small business. If the investment method incurs setbacks, then the final investment return register a substantial loss. The article help understands the phrase time is money. According to the article, every job and service given are based on the total amount of time spent. The more the time dedicated to a product or service, the more expensive it becomes, and more money will be earned (Fairsave, 2016). Therefore, the article explains that time is a mans best friend. When the time is well spent, and investments are well placed then the outcome after a certain time lapse are beneficial.
From the article, it is recommendable that the best investments with the greatest profits are those made earlier than later. However, the higher the interest rates is attached to ones investment the more the financial outcome at the end of the investment it will bulge. When one begin saving later, the interest earned are small, and therefore, it becomes difficult to accumulate enough funds. The author gives an example of pension saving. The earlier one enrolls in a retirement program, the bigger the interest rates earned, unlike a person who begins later. Time is a mans best friend, and it is through timing the best investments are made.
Importance of the Article
The article value to explain what exactly time value money means, and according to explanations money in hand, today is worth more than a dollar to be acquired in the future. Money that one has in hand can be invested to generate interest. Also, money that one has in hand is realistic, and it helps eliminate threats and risks, for example, promised money to be given in the future is not a sure thing since the person can choose to default terms of agreement (Merritt, 2012). Also, the opportunity cost is another factor explained by time value money cost.
When studying the concept of time value money future and present values are main areas of analysis. Future value help understands how small investments turn out to be huge sums of profit over time (Campbell, 2016). Compound interest explains the increased amount of money. However, a change in compound rates affects future interests. Present value is calculated by bringing money from the future back to today, also known as inverse compounding (Buchanan, 2011).
Before an entrepreneur decided to invest in business, the cost of the investment and the time it takes for a return to be made and the amount earned are factors of consideration (Steinert-Threlkeld, 2009). People invest capital in programs that they are not sure of the outcome, but by analysis of time, one can predict the outcome. For example, in case the economy of a country is facing high inflation rate, then that would be not an advisable period to begin a business. In case, supply is high, and demand is weak then that will be a long business investment for the time as losses will be incurred in the future due to poor returns made from the company (Medeiros, 2013).
Terms in the Article
Time Value of Money is a business term that explains the value of money at present than in the future of the same amount.
Interest rates are the charges placed or paid for one use of money and is expressed in percentages annually the interest rates are imposed after one agree to invest money in a project of when money is led or borrowed. This is the rate at which the returns made are calculated based on terms of the agreement.
Inflation is the hiked price of goods and services though with a drop in the value of the currency. Inflation rates are measured in Percentage, and when inflation is high, the dollar, for example, purchase fewer commodities in the market making life expensive.
Buchanan, M., (July 28, 2011). Einstein on Wall Street, a Time-Money Continuum
Campbell, B., (August 3, 2016). Is 70 too late to claim Social Security? CNN Money
Fairsave, L., (18 January 2016). Louise Fairsave: Time value of money.
Retrieved from http://www.nationnews.com/nationnews/news/76797/louise-fairsave-value-money
Medeiros, K., (6 September 2013). Why the Time Value of Money Matters, and 10 Ways It Affects You
Merritt, C., (2012). Why Is the Time Value of Money So Important in Capital Budgeting Decisions
Steinert-Threlkeld, T., (July 9, 2009) On Wall Street, the time value of money has been redefined. It does not include you. An electric signal takes a nanosecond to travel a foot, essentially. These days, that distance matters.
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