The Timekeeper’s Treasure: How To Use Time Value of Money in Everyday Life

Time Value of Money is more than just textbook theory. Understanding the concept will aid us in making decisions when faced with choices, especially in financial matters.

We've all heard the saying, "Time is money." But don’t be quick to dismiss this as some overused cliché. Meet its twin, the Time Value of Money (TVM).

 

Embrace this concept, and you will find that making decisions has become less vexing when faced with a choice.

 

This can become an everyday tool, guiding your spending on the once-a-week restaurant dinner to your retirement savings. Sounds interesting, right? Let's learn about it.

 

Don’t Dismiss This as Rocket Science

 

In its simplest form, Time Value of Money tells us that a rupee today is worth more than the same rupee tomorrow.

 

Why?

 

Because today's rupee has the potential to earn interest.

 

Imagine being offered a mango today or the promise of one tomorrow – most of us would pick the sure thing, the mango today. It's the same deal with money. Today's rupee, when invested wisely, has the potential to grow.

 

It's safe to assume most of us would choose the former - the allure of instant gratification combined with the uncertainty of tomorrow.

With money, too, it’s similar. The mango in this scenario is the interest your money can earn when invested wisely.

 

How To Use TVM In Financial Decisions?

Savings

 

Tapping into the power of Time Value of Money can start with something seemingly insignificant as choosing public transport over personal transport for your daily commute.

 

It's simple arithmetic - Let's say you save ₹150 a day by choosing to travel by public transport.

 

Doing this consistently, you'll end up with ₹54,750 by the end of the year. Deposit this amount into a savings account with a 5% annual return, and lo and behold, you'll have about ₹57,487.50 by the end of the year.

 

That's nearly ₹3,000 extra, all thanks to understanding and using TVM.

 

So, next time you're about to splurge on something you don't really need, remember the golden goose of compound interest and think again.

 

Investing

 

The first place to test your understanding of TVM is investing.

 

It's no secret that wise investments can turn into handsome payoffs.

 

But where does TVM fit in, you ask?

 

Let's break it down.

 

When considering an investment opportunity, you'll want to compare the future value of your investment against the money you'd be forking out today.

 

In this scenario, a common rule of thumb is to choose an investment if the future value (adjusted for risk and inflation) exceeds the present cost.

 

This way, you ensure your money grows over time, keeping up with TVM.

 

Retirement Planning

 

Steering the ship of your financial life without a retirement plan is akin to sailing without a map - you'll likely end up lost at sea.

 

TVM can be the wind in your sails here, helping you understand how much you need to save now to live comfortably in the future.

 

It's quite straightforward - the more time your money has to grow (read: the earlier you start saving), the larger your retirement fund will be, thanks to the magic of compounding.

 

Debt Management

 

Taking on debt may sometimes be unavoidable, but it shouldn't mean being stuck in a financial storm. By understanding TVM, you can assess the cost of borrowing, factoring in the interest that'll accrue over time.

 

Remember, a rupee borrowed today will be more than a rupee repaid in the future. Therefore, it's crucial to borrow wisely, ensuring your future self isn't burdened with a mountain of debt.

 

A rule of thumb is only to take on debt if it leads to a higher value in the future (like a home loan or education loan).

 

Emergency Fund

 

An emergency fund is like a lifeboat, essential in case of financial emergencies.

 

But how much should this fund contain?

 

You need to consider your future financial obligations and the potential earning capacity of the money if invested elsewhere. Generally, it's advisable to have six months of expenses stashed away. TVM comes into play here, too.

 

Of course, there are different ways to compute TVF depending on the investment type being evaluated.

 

Remember that Time Value of Money is the fundamental principle, but its application could vary depending on the situation.

 

We will look at the different applications in another article.

 

 

FAQs

 

What's Time Value of Money?

In essence, TVM is the idea that a rupee today is worth more than the same rupee tomorrow, thanks to its potential to earn interest.

 

Why does Time Value of Money matter?

Understanding TVM can help you make smarter decisions about saving, investing, and borrowing, setting you up for a solid financial future.

 

How does Time Value of Money affect my daily life?

From deciding to save instead of spending, to making wise borrowing choices and planning for retirement, TVM can shape your financial habits in significant ways.

 

Money Dynamics

 

Time Value of Money isn't some esoteric theory meant only for investment wizards or economics buffs.

 

It's a potent, practical tool that can influence money-related decision-making in our daily lives.

 

It's all about recognising that money's value isn't static - it changes with time.