Time Value of Money:
Concepts and Calculations
Are you a student? Did you know that Amazon is offering 6 months of Amazon Prime - free two-day shipping, free movies, and other benefits - to students? Click here to learn more
One of the most fundamental concepts in finance is that money has a “time value.” That is to say that money in hand today is worth more than money that is expected to be received in the future. The reason is straightforward: A dollar that you receive today can be invested such that you will have more than a dollar at some future time. This leads to the saying that we often use to summarize the concept of time value: “A dollar today is worth more than a dollar tomorrow."
The purpose of this section of my site is to introduce you to the concepts, terminology, and mathematics of the time value of money. Understanding this material is crucial to understanding all sorts of solutions to financial problems in personal finance, investments, banking, insurance, etc. Please note that because financial calculators and spreadsheets can do these calculations so easily, many people assume that they don’t need an understanding of the underlying mathematics. I can assure you that this is false. If you don’t understand the math (what the calculator or spreadsheet is actually doing), then you won’t really understand the solution. Even worse, you won’t be able to recognize when you get the wrong answer.
If the concept of the time value of money is new to you, it will be best if you proceed through this tutorial in order. Click a link in the table of contents (above left) to get started, or click next to proceed from the beginning!