Time Value of Money.

  • Some people put their money in a bank account; some make investments in stocks and bonds.
  • Different people follow different strategies to keep their money on the move.
  • All of them consciously or unconsciously realize time is the biggest enemy of idle money.
  • So, the concept of time value of money always influences our decision about what we intend to do with our money.
  • But what makes a rupee in our hands today worth more than a rupee tomorrow?
  • What is so difference about currencies made of paper that the value of the same amount of money diminishes with time?
  • You need not to be a philosopher to understand the concept of time value of money.
  • A Rs.100 note today in our pocket is worth more than a Rs.100 note that we may get after five years. All of us intuitively know that.
  • But let’s try to understand what actually makes the present value of money worth more than the value of the same amount of money after five years.
  • Money is just another name for new opportunities.
  • The money that you have now can open the doors for many opportunities. different uses of money may have different advantages.
  • Some of these opportunities may look very small but some of them might really put you on the fastest track to the future.
  • If you invest your money now, you would earn a return which would make your money grow in the next five years.
  • But the problem is you can choose only one of the many equally advantageous opportunities. All of us try to use our money for the best possible opportunities.
  • The advantage that we forego by not putting our money in another possible opportunities is what is called the Opportunity Cost of Money.
  • So, if you are investing your money in a 10-year bond that pays you 10% interest, then you are foregoing an opportunity of putting the same money in a 10-year term deposit that pays you 8% interest.
  • In this case, your actual advantage is only the 2 percentage points more interest that you earn on your investment in bonds.
  • But always remember that different opportunities have different risks. Investment in bonds may be riskier than investment in term deposits.
  • So you should always compare the risk-adjusted return to find out whether you are gaining or losing in making a particular use of money.
  • The first thing you must keep in mind is that you should never keep your present money idle.
  • Money has to grow with time. Invest it in stocks or bonds so that the return is good enough to at least preserve its present value.
  • And still better, take the mutual funds route to take advantage of professional fund management services.
  • If you invest Rs. 1 lakh now, what should its worth be after 30 years if you are earning 10% return per annum compounded annually?
  • For your knowledge, let me tell you that Rs. 1 lakh would be worth Rs. 17.45 lakh after 30 Years.
  • The concept of time value of money says that the value of money at present is worth more than the same amount of money in the future.
  • By making appropriate investment decisions, we can make money grow with the passage of time.

Start SIP (Systematic Investment Plan) today or Invest in Mutual Funds for better returns.

*Prof. Simply Simple

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