You haven’t seen your grandparents in so long and when you do they give you a white envelope containing a nice, crisp $100 bill. Do you immediately take it to the bank or decide to keep it in your hot pink piggy bank until you finally decide what you wanted to do with it. If you choose to keep it in your piggy bank, then you picked the right choice.
TVM, time value of money, is the belief that money is worth more in the present because it may never materialize in the future. With the money that you have in your back pocket, you’re able to invest it in a variety of different stocks and it will be able to grow interest over a period of time and this is also known as present discounted value.
Investing your money into stock is beneficial but you must know the difference between the two types of interest rates. The first one is a fixed interest rate that will not change over time and this is best applied when you are paying your monthly car loan because you know for sure that you are paying the same amount every month and it will unlikely increase. The second type of interest rate is variable rate which is an interest rate that fluctuates because it is based on how much benchmark rates rise or fall in the open market. You will most likely see this in your credit card because the interest may suddenly change without you being informed about it. This can also be seen in loans and mortgages. In loans the interest rate may vary because it depends on how soon you completely pay off the loan. In mortgages the variable interest rate is known as adjustable rate mortgages (ARMS)
If you want to know exactly how much you will gain use the TVM formula: FV = PV x [ 1 + (i / n) ]^(n x t). Future value (FV) which shows what your money will be worth in the future and hopefully gaining interest. Present value (PV) is what your money is worth right now. I stands for interest such as a bank paying you for putting your money in the bank. N is the number of periods which means how long your present value will take to increase and T stands for time specifically the number of years the money is held.
Written and Researched by Valerie Hui