Glossary
Time Value of Money
Why money today is worth more than the same later
The time value of money is the principle that the same sum is worth more now than later, because money received today can be put to work and grow.
A million today and a million in a year are equal amounts but not equal value. At 5%, today's million becomes 1.05 million in a year — and conversely, a million a year out is worth about 950,000 today.
Inflation compounds the effect. Since the same money buys less as time passes, a payment received later is discounted twice over.
This principle underlies nearly every calculation in finance: loan interest, pension payouts, company valuations, rental yields — all convert future money into today's value before comparing.
It changes everyday decisions too. Whether 10,000 now beats 12,000 in five years depends entirely on what you could earn in between. A bigger number is not automatically better.