Summary
An introduction to the principle that money changes value over time due to its potential to earn interest and the power of compounding.
Understanding the Time Value of Money
Highlights
The Concept of Time Value
The time value of money is a foundational financial principle stating that a dollar today is worth more than a dollar in the future. Because money can be invested to earn interest, receiving funds sooner allows for growth, making immediate possession preferable to deferred receipt.
The Power of Compounding
When interest is earned on both the principal amount and previously earned interest—a process known as compounding—investments grow exponentially over time. For example, investing $1,000 at a 10 percent interest rate demonstrates how earnings accumulate significantly year over year.