Time value of money (TVM)

Definition

Time value of money (TVM) in plain English

The time value of money is the simple but powerful idea that a dollar in your hand today beats a dollar you'll get next year. Why? Because today's dollar can be invested to earn interest, it's certain (a future promise might fall through), and prices tend to rise so it buys more now. It's the reason banks pay you interest to save and charge you interest to borrow — money has a 'rental price' for time. Almost all of finance is really just careful bookkeeping around this one truth: cash sooner is worth more than the same cash later.

Learn these first

• Option
• Principal

Related Principles of Finance terms

• Adjusted EBITDA
• Amortization
• Annuity
• Annuity due
• Arithmetic mean return
• At the money (ATM)
• Binomial model
• Call option
• Compounding
• Continuous compounding