What is the Time Value of Money

Kevin McCormally explains the time value of money and how to use this concept to your advantage.

I’m Kevin McCormally of Kiplinger’s with the look at one of the most fundamental concepts of personal finance. It’s called a time value of money, and it’s really pretty simple. It’s simply means that the dollar receive today is what more than the dollar receive in the future or vice versa a dollar receive down the road is worth less than when you can put your hands on today. For one thing money you have today can be invested today to start earning money for you at the same time inflation can extra believe you wrote the value of the dollar you won’t receive until later. There are also complex financial tables and financial calculators both held on the row that help you compute the time value of money. But this also a quickie test to help you immediately grace this concept it’s called the rule of 72. If you need to know how long will take for your money to double, for $10,000 investment to grow $20,000 for example divide the number of 72 by the announce you’ve expect the investment to earn each year. If you can in every January return if 6% for example dividing 72x6 tells you that your money will double in 12 years. Or if you know you need that $20,000 in just ten years divide 72x10 to find out that you need a final investment to pay 7.2% a year. The rule of 72 can also reveal the impact of inflation, if the inflation is running you 4% a year dividing 72x4 tells you that in 18 years a dollar would be we’re just half as much as it is today. The rule of 72 isn’t this precise as financial calculator but it will help you keep the time value of money and mine when your considering financial decisions.