← Back to Learn Investing

The Time Value of Money: Why a Dollar Today Beats a Dollar Tomorrow

Money Basics • Beginner Investing • 6 min

What this lesson is about

A dollar in your hand today can be put to work immediately. A dollar promised for later cannot, and that gap is worth real, calculable money.

2 parts · a quick check after each · then the quiz

Part 1 of 2

If, someone, offered, you, $1,000, today, or, $1,000, in, 10, years,, the, choice, is, clear., It's, not, just, about, trusting, them, to, have, the, money, later., A, dollar, today, can, work, for, you., You, can, deposit, it,, invest, it,, or, pay, off, high-interest, debt., A, dollar, promised, in, the, future, can't, do, anything, until, it, arrives,, and, by, then,, it, probably, won't, buy, as, much.

This, concept, is, the, time, value, of, money., It’s, usually, summed, up, with, a, formula:, FV, =, PV, ×, (1, +, r)^n., Here,, PV, is, the, present, value,, r, is, the, rate, of, return,, and, n, is, the, number, of, years., Invest, $1,000, today, at, a, 7%, average, annual, return., In, 10, years,, it, grows, to, about, $1,967., That's, not, because, you, added, more, cash,, but, because, each, year's, return, starts, earning, returns, too.

Compound growthChange the amount, the rate and the years. The curve is the point.

Quick check

What is the core idea behind the "time value of money"?

Part 2 of 2

Insider, Angle:, The, same, formula, works, in, reverse., It, helps, answer, this, question:, what, is, a, future, payment, worth, today?, This, is, known, as, "discounting.", A, promise, of, $1,000, in, 10, years,, discounted, at, 7%,, is, worth, roughly, $508, today., So, if, someone, offers, you, $600, now, or, $1,000, in, 10, years, at, that, rate,, the, $600, now, is, actually, the, better, deal., It, may, seem, like, $1,000, is, more,, but, it’s, not., Investment, banks,, pension, funds,, and, others, value, businesses, using, this, math, every, day, to, compare, cash, flows, that, come, at, different, times.
Try, This:, Using, FV, =, PV, ×, (1, +, r)^n,, calculate, how, much, $500, invested, today, will, grow, in, 20, years, at, a, 7%, average, annual, return., Then, do, it, again, at, 5%, and, see, how, that, 2-point, difference, affects, the, final, amount.

Quick check

Besides opportunity cost, what is another key reason a future dollar is worth less than a dollar today?

Quiz

Master this lesson

Test what you just learned. Correct moves you up, wrong moves you down - reach 100 to master this lesson.

0
/ 100
Log in to save your progress and earn XP.

Related lessons

Swipe for more
What Is Money, and Why Does It Exist? Before there was money, trading required both people to want exactly what the other had. Money exists to solve that problem, and it has looked very different across human history. 5 min Beginner Earning, Spending, Saving, and Investing: The Four Things You Do With Money Four different jobs, one paycheck: what you do with money after you earn it determines almost everything about your financial future. 6 min Beginner How Banks Actually Make Money From Your Deposits Your deposit doesn't sit in a vault with your name on it. Banks lend most of it out at a higher rate than they pay you, and the gap is their business model. 6 min Beginner